To combat the growing threat of financial fraud, the identity verification process of organizations has become more advanced. With criminals developing increasingly sophisticated ways to bypass systems and databases, institutions in the financial industry answered calls to improve their security infrastructure.
Unfortunately, malicious acts such as identity theft and money laundering will continue to plague financial institutions. Based on a recent study, firms in the United States have lost more than $721.3. billion in 2020. Meanwhile, in 2021, there had been a 3% increase in global identity theft incidents from the previous year, accounting for 25% of all fraud reports.
Due to rampant fraud in the financial industry, having robust identity verification ensures companies that the client they are transacting with is the person they claim to be. This plays a pivotal role in a financial institution’s anti-money laundering (AML) and Know-Your-Customer (KYC) efforts. It is also a vital tool in client risk assessment, especially since financial fraud is rampant.
What is Customer Risk Assessment?
Client or customer risk assessment (CRA) is integral in a financial institution’s screening process. All organizations must carefully assess their clients before making a formal transaction since certain individuals may pose a threat to the institution.
However, depending on the situation, they can conduct periodic reviews and ad hoc procedures. The series of measures ensures that new customers are analyzed for potential risks.
The approach to customer risk assessment depends on the complexity of the transaction. Complex business relationships require a more meticulous and structured process. After evaluating a client’s financial risk, organizations can make a more informed decision on the level of due diligence and background check they need. These procedures can prevent fraud and money laundering activities.
The Fundamental Aspects of Customer Risk Assessments
The following aspects of CRA serve as an essential guide for financial institutions. Understanding these principles will help your organization streamline and standardize its CRA process.
1. Customer risk identification
This aspect refers to the factors that can establish a customer’s likelihood to commit fraud or other financial crimes. The first step is for the financial institution to require documentation to prove one’s identity. This process of identifying and describing potential risk factors includes the following elements.
a. Individual or entity
Examining an individual or legal entity requires different approaches. Individual customers usually open accounts for personal or family use but their behavior can signal money laundering risks. Meanwhile, money launderers use legitimate business entities to perform their illegal activities.
b. Client profile and affiliations
This involves knowing a client’s employment history, social background, and family and business relationships. For example, a customer who has never been employed but wants to deposit a considerable sum of money is usually a red flag. Those involved in politics may have a greater risk for bribery, money laundering, or terrorist financing.
c. Geographic risk
People with no permanent ties to a specific country may be at a greater risk than residents or citizens. Furthermore, people who transact at banks or financial institutions far from their homes or workplaces need further investigation. Usually, money mules carrying massive cash amounts open accounts at various locations to avoid cash transaction reporting.
d. Types of services inquired
The type of services that a customer asks about is a crucial risk factor. What they plan to do with the account can signal money laundering activities. For example, questions about frequent cash deposit procedures or cross-border wire transfers need close monitoring.
2. Customer risk scoring
After the bank has examined the above mentioned risk factors, it’s time to identify the individual or entity’s risk score. Customer risk scoring helps a financial institution identify clients with higher money laundering risks. Several countries, including the U.S., legally require this scoring method. The following are the risk categories:
a. Low Risk
This includes customers with identities and income sources that banks can easily trace. They also have past transactions that conform to their presented profile.
b. Medium Risk
This category includes customers who have a higher-than-average risk. It may consist of people or entities whose place of business or residence has a history of illegal trading activities.
c. High Risk
The customers under this category require stricter due diligence, especially if their source of funds is unclear. They may include high net worth individuals, nonresidents, or politically exposed persons.
This category is for individuals or entities who have committed financial crimes. They are banned from transacting with banks and other financial institutions.
Secure Your Organization with Trusted Identity Solutions
The losses incurred by the financial industry due to hackers, money launderers, and identity thieves have increased over the years. Banks and other financial institutions face an extreme challenge as they contend with numerous and more sophisticated financial crimes.
Fortunately, a trusted identity authentication system can provide security and authentication to fight identity theft and money laundering. Offering financial services requires having an identity solution that can authenticate transactions effectively. The good news is partnering with experts such as Q5id will allow you to do just that. Schedule a meeting with us today to learn more!
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