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‘Enhanced’ customer due diligence must now be performed on ‘high risk’ clients on-boarded since 1 June 2014, but the problem is that there’s no one-size-fits-all definition of ‘high risk’.

Here’s a guide to help you accurately classify your clients’ risk category.

Step 1 – Define your Risk Categories

The starting point is to define the risk categories that you will apply to your clients, e.g. ‘Standard Risk’ and ‘Higher Risk’.

Step 2 – Develop your High Risk Indicators

Next, develop a series of High Risk Indicators that you will use to determine whether a client is a Standard Risk Client or a Higher Risk Client – if a High Risk Indicator is present, you have identified a Higher Risk Client.

Because your ML/TF risks are intrinsically linked to the nature of your business, consider the actual products and services you provide and how you deliver them when developing your High Risk Indicators. For example, services that provide more anonymity (such as stored value cards and internet banking/investments) inherently increase ML/TF risk.

Step 3 - Check Relevance

Ensure that your High Risk Indicators are relevant to your business - take into account globally recognised risk factors such as:

  • The location of the client and the people/organisations they transact with e.g.
    • Are they in close geographical proximity to you and if not, why not?
    • Are they in a foreign country and if so, what impact does that have on risk (e.g. is the country subject to trade sanctions laws or high on the Corruption Perceptions Index)
  • Does the client operate through high volume cash activities or a cash intensive business (e.g. convenience stores, liquor stores and restaurants)?
  • Is it easy to identify the true ‘owner’ of the client or their funds and wealth?
  • Does the client operate an un-regulated charitable or ‘not for profit’ organisation?
  • Are the client’s business / investment objectives clear and aligned with the service they are seeking?
  • Is the client a politically exposed person or related to one?
  • Has a suspicious or potentially suspicious matter arisen?

TIP: The better you define your High Risk Indicators, the easier they will be to implement effectively.

AML/CTF is a complicated area - so when in doubt, seek legal advice. We’re always happy to help.

Author: Lesley Hambusch

November 2014

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