Navigating The Complexity of Ownership From The Lens of Sanction By Extension

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Lapses in UBO Identification, Sanctions Compliance, and Corporate data

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Mark Bain


Louie Vargas


Michael Harris

Risk Assessment

27 September, 2023

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Accessing the risk that a business may pose is challenging to do. Not truly understanding your customers and partner entities can cost a lot. Regulators require businesses to conduct due diligence and risk assessment on a company they will do business with. Failure to maintain regulatory compliance can cause firms heavy fines and reputational damages.

What is a Risk Assessment?

Risk assessment is the process of analyzing money laundering and other financial crime risks that a business entity may pose. This includes verifying the business, the services and products they offer, and the type of transactions they entertain. 

Firms have different levels of risk appetite based on the companies they are willing to do business with. However, it is worth noting that an ongoing risk analysis method is implemented that sets the criteria for client risk scoring. The more complex the interaction with another firm is, the more comprehensive risk assessment is needed. The Financial Action Task Force (FATF) suggests not to develop a business relationship or terminate the connection if the firms do not conduct Customer Due Diligence  (CDD).

Who Should Assess the Customer Risk?

AML risk assessment is not only conducted by banks these days. Online casinos, cryptocurrency exchanges, loan firms, fintech companies, and traditional financial institutions perform a rigorous compliance risk assessment. In fact, these firms are required by the law to authenticate user information. The laws include:

  • UK Proceeds of Crime Act 2002
  • JMLSG Guidance
  • US Patriot Act
  • International Money Laundering Abatement and Anti-Terrorist Financing Act
  • Third European Money Laundering Directive

The Core Elements of a Risk Assessment

The organization’s fraud risk assessment process can be optimized standard by understanding these core elements.

1. Customer Risk Identification

This aspect refers to the elements influencing a partner entity’s inclination toward financial crime. Financial institutions initially require any business’s documentation. The subsequent components are an integral part of the process for detecting and outlining various risk factors.

  • An Organization

Criminals use many banks to open accounts but with the hidden goal of fulfilling illicit intentions such as money laundering. Thus, it is important to analyze that the organization is not a hotspot for financial crime before entering into a business relationship.

  • The Entity’s Affiliations and Profile

This entails being cautious of the organization’s history and partnerships with other firms. An entity affiliating with firms that appear on the sanctions list usually raises a concern. It is essential to check the business’s profile, such as its Ultimate Beneficial Owners (UBOs) and adverse media coverage, for better risk management.

  • Geographic Risk

Organizations without ongoing ties to a specific country may present a higher risk. Moreover, it is essential to research whether the banks and other financial firms are entertaining transactions at locations other than where they are based. Money mules usually transport a handsome amount of cash, frequently opening accounts at different locations to avoid reporting their transactions.

  • Service Types Required

Checking the types of services an entity requests is critical to business risk assessment. Such service inquiries give insights into detecting potential risks, particularly illicit activities like money laundering. For example, frequent and substantial cash deposits or global wire transfers to high-risk jurisdictions can raise suspicion. This demands careful scrutiny to ensure adherence to Anti-Money Laundering (AML) regulations. 

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2. Customer Risk Scoring

After considering the aforementioned criteria, the bank and financial firms determine the entity’s risk score. A business can identify entities with a higher risk of money laundering through customer risk scoring. The law requires a risk-scoring system in several countries, including the US. 

Here are the different risk categories:

  • Low-Risk Customer

This includes entities whose identities and origins of funds can be easily monitored. Moreover, the previous transactions they entertained match the profile offered.

  • Medium Risk Customer

These entities fall under the group of higher-than-average risk customers. It might include a business or a group of businesses with a track record of unauthorized trading operations.

  • High-Risk Customer

Entities falling into this category need to undergo comprehensive due diligence, especially if their origin of income is unknown.

  • Prohibited

This category is for organizations that were engaged in any kind of financial crime. They cannot enter a business relationship with banks or other firms.

Conducting a Risk Assessment Effectively

Whether you are running a startup or a well-established firm, below are the steps to conduct an adequate risk assessment:

  • Designate a specialist, a team member, or the whole team with the task of risk management
  • Identify risks that are unique to your company
  • Access the risks and check how they will impact your company
  • Obtain all potential risk factors 
  • Establish Key Performance Indicators (KPIs) to monitor and measure the risk rates

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