Identifying and Managing High-Risk Customers

High-risk customers are individuals or entities who may be deemed as a threat to your business as they can harm your reputation and operations. Early identification and understanding of proper management techniques can protect your company from illegal activity.
Get started →

Julia Ront, Founder and CEO of Vespia

June 26, 2024

Identifying high-risk customers is one of the most important steps in taking a risk-based approach to Customer Due Diligence (CDD). This can signify when to launch Enhanced Due Diligence (EDD) processes.

Depending on the complexity of their situation, every high-risk customer can pose several challenges and threats to businesses. Understanding who they are will enable financial institutions to manage these kinds of clients effectively.

In this article, we cover the complexities of a high-risk customer, how to identify them, and what steps you can take to best deal with them.

Who are high-risk customers?

High-risk customers include individuals and entities who might expose a company to threats and drastically affect their business reputation and operations. This makes it imperative for financial institutions to conduct a risk assessment for each customer, determine their risk levels, and protect the business while staying compliant with anti-money laundering (AML) laws and regulations. If not, they can face compliance issues and fines.

There are many kinds of risks they could pose — especially as transactions today can be done online. Some instances financial institutions might face with high-risk customers includes:

  • Stealing company information
  • Attempted money laundering
  • Hacking other user accounts
  • Other fraudulent activities

Types of high-risk customers

Knowing what signs to look out for can help you easily identify high-risk customers. Depending on a person or entity's industry and background, they may have a bigger chance of exposing your business to non-compliance on regulations, financial loss, and reputational damage.

These are some types of high-risk customers that businesses may encounter.

1. Politically Exposed Persons (PEPs)

Politically Exposed Persons (PEPs) are high-ranking individuals in society. Considering how much influence they have on a large body of people, there is a chance of corruption and bribery occurring.

These people can hold prominent public positions and can be government officials or executives of state-owned enterprises. Any relations like family members and close associates should also be considered high risk, depending on the nature of their relationships.

2. Customers from high-risk jurisdictions

The Financial Action Task Force (FATF) has deemed several countries as high-risk jurisdictions, subjecting customers from these countries to heightened screening for money laundering, terrorist financing, and other financial issues. There are different reasons for them to be flagged as high-risk countries. It could be due to weak regulatory frameworks, high corruption rates, and other illicit activities.

3. High Net Worth Individuals (HNWIs)

Customers with a significantly large stream of financial resources can pose as a risk to businesses. This is due to the amount of money they can move across borders when traveling. Conducting the necessary EDD practices to ensure the legitimacy of any source of funds can go a long way in protecting money service businesses.

4. Customers with virtual assets

Entities and individuals who hold a large portion of virtual assets like cryptocurrency are considered high-risk customers. On its own, cryptocurrency has an anonymous nature that makes it much easier to launder money and conduct other illicit financial without being detected as fast.

5. Clients with complex business structures

Identifying ultimate beneficial ownership (UBO) information is crucial to any institution's due diligence measures. There may be entities with a suspiciously complicated ownership structure with multiple layers of subsidiaries and offshore accounts that don't seem necessary. A complex business structure might be used to hide illegal nature and ownership of funds.

6. Cross-border and offshore clients

Staying vigilant of clients who frequently engage in cross-border transactions or have a tendency to use offshore banks is important. A high volume of these types of transactions might be used to make monitoring and the verification of transactions more challenging to intentionally hide illegal activities.

7. Cash-based businesses

A customer's industry or business sector can contribute to the risk level they might have. Every financial institution is different and choosing to support the risk level of clients in high-risk industries like gambling, real estate, and cash intensive-businesses should be efficiently supported.

Companies and businesses that operate on a majority of cash transactions should also be heavily monitored. Businesses to pay particularly more attention to are gambling businesses like casinos and luxury stores like jewelers. These may be used as a front for money laundering, fraud, and tax evasion.

8. Clients with inconsistent financial profiles

Customers who have financial activities with high spending habits that may not match their profile or business operations are also worth looking into. These clients have a noticeable discrepancy on their reported income and actual transaction. They can pose as risk to your business and may require heightened monitoring.

Factors to consider when dealing with high-risk customers

When dealing with high-risk customers, several factors must be considered to manage risks effectively and ensure compliance with regulatory requirements. Here are the key factors you'll want to secure in your compliance program if you're looking to do business with high-risk clients.

Verifying source of funds and wealth

A high-risk banking customer should have a legitimate source of funds and wealth. Scrutinizing the origins of an individual and more especially, a business's funds with the necessary verification methods can impact the final decision of your risk assessments. Once a customer risk rating is classified as a higher risk, you can launch the relevant monitoring plan and limits to keep them in check.

Ongoing monitoring

Identifying high-risk clients means financial institutions must be ready to implement robust transaction monitoring systems that can automate the detection of unusual or suspicious activities. This can also ensure that a customer's information is accurate for compliance better risk management.

An efficient transaction monitoring tool can conduct real-time tracking and alert businesses to significant anomalies that need to be addressed.

Customer’s reputation and background

Knowing your customer and business includes considering their reputation. The best way to do this is by screening your customer's background, checking for any adverse media reports, legal issues, and possible associations with criminal activities and transactions can inform you of what to expect on whether or not they're opening an account for illicit purposes.

Updated regulatory compliance

Ensuring compliance with local and international regulations is necessary to ensure businesses do not face additional compliance fines. It's important to keep your compliance programs updated on all Know Your Customer (KYC) and Know Your Business (KYB) regulations, AML and counter-terrorist financing (CTF) laws as there may be changes that need to be observed.

Working with a risk assessment software and other useful transaction monitoring tools can help streamline your workflow as their templates and systems can ensure you stay up-to-date on regulatory requirements at any time.

Finding the best solution to screen customers

Onboarding new clients should be quick and efficient, especially in an age where technology can easily automate many of our standard tasks. While speed is a valuable indicator of efficiency, it's also worthwhile to identify and detect high-risk customers.

Recognizing who may pose as a threat to the business allows you to take the appropriate precautions to mitigate potential risks and ultimately protect your company and clients.

Vespia takes high-risk customers seriously. That's why our Risk Assessment Solution ensures Customer Due Diligence and Enhanced Due Diligence procedures are done accurately with speed while keeping your business compliant. Book a demo today and see how you can protect your business with us.

Write a comment

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
Author Name
Comment Time

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Suspendisse varius enim in eros elementum tristique. Duis cursus, mi quis viverra ornare, eros dolor interdum nulla, ut commodo diam libero vitae erat. Aenean faucibus nibh et justo cursus id rutrum lorem imperdiet. Nunc

Author Name
Comment Time

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Suspendisse varius enim in eros elementum tristique. Duis cursus, mi quis viverra ornare, eros dolor interdum nulla, ut commodo diam libero vitae erat. Aenean faucibus nibh et justo cursus id rutrum lorem


More blog posts

You might also be interested in these