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High-risk customer definition and meaning | AML glossary

What is a high-risk customer? Definition and AML compliance meaning.

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High-risk customer definition: What it means in AML compliance.

In the world of Anti-Money Laundering (AML) compliance, identifying high-risk customers is a key part of keeping your business secure. But who exactly qualifies as a high-risk customer? Broadly speaking, these are customers whose activities or characteristics present an increased risk of money laundering or financial crimes. High-risk customers can come in all shapes and sizes, but what they have in common is that they are more likely to be involved in activities that could jeopardise the integrity of your organisation or violate financial regulations.

One of the most obvious indicators of a high-risk customer is a foreign national from a country with weak or poorly enforced AML laws. This could be because they’re from a jurisdiction that is on international watchlists, like the Financial Action Task Force’s (FATF) high-risk country list. This doesn’t automatically make someone a criminal, but it does signal a need for additional due diligence. Similarly, politically exposed persons (PEPs), individuals who hold a prominent public role, are often flagged as high-risk. Their position of power makes them vulnerable to bribery or corruption, which could then be used as a vehicle for money laundering.

Another key characteristic of a high-risk customer is their transaction history. If a customer frequently transfers large sums of money without a clear, justifiable reason or shows patterns of behaviour that don’t align with the normal expectations of their account, this could raise a red flag. This could also apply to customers with complex financial structures that are hard to understand or transparent. In these cases, suspicious transactions are a clear sign of potentially illicit activity.

High-risk customers might also be business entities rather than individuals. For example, companies operating in high-risk sectors, such as casinos, real estate, or cryptocurrency, often face more scrutiny due to their higher likelihood of being used to launder money. It’s important to have systems in place to track and monitor these kinds of customers as part of your overall AML compliance framework.

What impact do high-risk customers have on compliance teams?

High-risk customers require a much more detailed and intensive approach to AML compliance. This means a more comprehensive risk assessment, enhanced due diligence (EDD), and ongoing monitoring of their risk profiles and activities. Enhanced due diligence is one of the most important steps in handling high-risk customers. This involves digging deeper into the customer’s background, financial history, and business operations to better understand their risk profile.

The level of scrutiny should be proportional to the risk. For example, if you’re dealing with a PEP, you’ll need to understand their sources of wealth, their political connections, and any past allegations of corruption. With foreign nationals, you might need to request additional documentation, such as proof of income or information about the customer’s business interests.

However, it’s not just about gathering more information – it’s also about being proactive in monitoring these customers. High-risk clients should be subject to increased scrutiny throughout the entire relationship. This means regular checks on their transactions and monitoring for any suspicious activities. A sudden large transfer, a rapid change in their transaction patterns, or transactions that don’t align with their stated business or financial activities should raise alarms.

For organisations in the UK, AML compliance also means staying aligned with regulations from bodies like the Financial Conduct Authority (FCA) and adhering to the Proceeds of Crime Act (POCA). These laws require businesses to report suspicious activities related to high-risk customers. Failing to do so can result in severe penalties, including fines or, in extreme cases, loss of your licence to operate.

Another important aspect of dealing with high-risk customers is continuous staff training. Your employees need to be fully aware of the types of behaviours to watch out for, how to properly conduct enhanced due diligence, and how to report suspicious activities in line with your company’s procedures. You can have the best systems in place, but if your staff aren’t trained to spot the red flags, your efforts may fall short.

Finally, it’s essential that your policies and procedures are kept up to date, particularly as regulations evolve. The risk landscape is always changing, and so should your approach to monitoring high-risk customers. Having a dynamic system in place that adapts to new threats will help you remain compliant and avoid costly mistakes down the line.

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