Third-Party Risk in Anti-Money Laundering (AML) | AML glossary
Third-party risk definition: What it means in AML compliance.
Third-party risk refers to the potential risks businesses face when working with external entities, such as suppliers, partners, and service providers, that could introduce exposure to money laundering or criminal activity.
Why is third-party risk Important in AML Compliance?
In AML, third-party risk arises when external entities are involved in financial transactions or business relationships that could facilitate illicit activity. Assessing these risks is vital for businesses to prevent compliance issues and potential criminal exposure.
Businesses must manage third-party risk to avoid legal, financial, and reputational damage, ensuring compliance with AML regulations and protecting their reputation. Non-compliance can result in severe penalties and scrutiny from regulators.
Types of third-party risk.
- Operational risk: Issues like fraud, delays, or ineffective services that can compromise AML controls.
- Reputational risk: The risk of associating with third parties involved in illicit activities.
- Legal risk: Exposure to legal action due to non-compliance by third parties.
- Financial risk: Losses caused by fraud or financial mismanagement by third parties.
How can we manage third-party risk?
To mitigate third-party risk, businesses should start by conducting thorough due diligence. This involves performing KYC checks and comprehensive risk assessments on potential third parties to ensure they meet AML standards.
Ongoing monitoring is also essential. Businesses should consistently track third-party activity to detect any suspicious behaviour or red flags that may indicate illicit activity.
Additionally, it’s crucial to establish contractual obligations with third parties, ensuring that AML clauses are included in contracts to hold external entities accountable for complying with regulations.
Finally, leveraging technology can enhance third-party risk management. Implementing automated risk assessment tools helps monitor and evaluate third-party risks more efficiently, enabling businesses to act proactively in preventing compliance issues.
Examples of third-party risks.
- Payment processors and banks: Partnering with institutions without strong AML measures.
- Supply chain partners: Working with suppliers in high-risk regions.
- Consultants and legal advisors: Risk of non-compliant firms advising on key matters.
- Outsourced functions: Ensuring outsourced operations comply with AML standards.
How technology can help with third-party risk management.
Advanced technology plays a crucial role in managing third-party risk and ensuring compliance with AML regulations. Automated screening tools can quickly verify entities against global watchlists, sanctions lists, and adverse media, reducing the risk of onboarding high-risk third parties.
Ongoing monitoring platforms provide real-time alerts on any changes in a third party’s risk profile, allowing businesses to respond proactively to potential threats.
Additionally, secure data analytics help identify hidden connections and suspicious patterns that might otherwise go unnoticed. By leveraging these solutions, businesses can strengthen their compliance frameworks and make more informed decisions about their third-party relationships.
We’ve worked with hundreds of regulated businesses. Let’s work together.
Book your free demo of our comprehensive ID&V, KYC, KYB and AML compliance management solution today.
Request Demo
Hi 👋 let’s schedule your demo.
Tell us a bit about yourself.
“
The system efficiently and effectively completes our KYC and KYB verification requirements during onboarding.
Robin Kear
Senior Account Executive
