Here are the four high-risk customer profiles we'll discuss in depth:
- Sanctioned Individuals and Entities
- Politically Exposed Persons (PEPs)
- Customers With Links to High-Risk Countries
- Customers With Links to High-Risk Business Sectors
1. Sanctioned Individuals and Entities
The first type of potential customer that all companies should avoid, like getting too close to the edge of a cliff, are individuals and entities appearing on global sanctions lists.
People, businesses, and organizations under sanctions by governmental bodies, such as the Office of Foreign Assets Control (OFAC) in the US and the UK's Office of Financial Sanctions Implementation (OFSI), seek methods to circumvent their financial restrictions.
And money laundering is a common way they attempt to go below the radar and continue their illicit activities.
Businesses and organizations with poor compliance measures and weak due diligence procedures may find themselves at the bottom of the metaphorical cliff.
How? First, it's illegal to have business dealings with sanctioned individuals, entities, or countries according to international laws and regulations (failing to comply creates a high risk of financial punishment and reputational damage). And secondly, businesses getting entangled in transactions involving dirty money from sanctioned parties makes them unwitting facilitators of money laundering schemes.
Also, remember this: Your customers may become sanctioned after initial know your customer (KYC) checks.
A vital way to flush out the potential money launderers and comply and anti-money laundering (AML) regulations is by having an effective sanctions screening program in place.
2. Politically Exposed Persons (PEPs)
The next type of high-risk customer that all businesses committed to stamping out money laundering should carefully manage are politically exposed persons (PEPs).
A PEP is an individual who holds a prominent public position; the most obvious example is a politician. But it also includes individuals such as directors at state-owned enterprises and civil servants (basically anyone with access and control over taxpayers' money).
Close family members of all the profiles mentioned above are also considered PEPs, given their influence and potential involvement in financial matters.
It's important to remember that PEPs are innocent people that require enhanced due diligence (EDD) because of higher money laundering risks. This issue has even been splashed over the newspapers after UK politicians were denied bank accounts (just for being a PEP).
But before your business decides how to manage a PEP customer carefully, the first thing you need to know is who are your PEP customers.
The best way to do this is to use a best-in-class PEP screening service, such as sanctions.io.
Recommended reading from the blog: What Are Politically Exposed Person (PEP) Checks? A Beginner's Guide
3. Customers With Links to High-Risk Jurisdictions
The next characteristic of a customer - with a higher potential of laundering ill-gotten money - may have are links to countries on high-risk lists.
But what lists are we talking about here?
As many readers know, the Financial Action Task Force (FATF) is the global money laundering and terrorist financing watchdog and sets international standards that most countries follow.
And the FATF publishes the following lists of countries with weak measures to combat money laundering and terrorist financing (AML/CFT):
- High-Risk Jurisdictions Subject to a Call for Action ("Black List")
- Jurisdictions Under Increased Monitoring ("Grey List")
You can learn who is on these lists and more about them in this sanctions.io article, which is updated regularly and worth bookmarking: FATF High-Risk Jurisdictions.
Regulated companies such as banks and fintech services must apply enhanced due diligence (EDD) (and further counter-measures) to customers with links to countries on the black list. Customers with links to the grey list also require increased monitoring.
But remember this: Even if your company is non-regulated, the benefits of adopting the same measures will also protect your business from legal, financial, and reputational risks associated with money laundering.
4. Customers With Links to High-Risk Sectors
An essential part of an AML and compliance team's job (in a risk-based approach to mitigating money laundering) is identifying customers with links to high-risk sectors.
High-risk sectors are industries or business activities more likely to be involved in money laundering or terrorist financing due to their inherent characteristics. Here are some of them:
- Cash-intensive businesses
- Real estate firms
- Luxury goods sellers
- Jewelry and precious metals dealers
- Money transfer services
- NGOs and charities
- Shell companies
- Gambling platforms
But how do companies find out what sector/s their customers are from?
This generally happens in the customer onboarding process when data, such as the nature of the business and the industry, is collected and verified - helping to determine if the customer belongs to a high-risk sector.
It's a process commonly known as customer due diligence (CDD).
Although it can be challenging (as many an AML officer can attest), as it can create friction in customer experience, implementing a robust CDD process is critical when identifying and filtering out high-risk money laundering individuals or entities.
Recommended reading - High-Risk Industries for Money Laundering and Terrorist Financing
Closing Thoughts and How sanctions.io Can Help
Flushing out potential money launderers from your business is vital for four reasons:
First, it mitigates the risk of financial loss. Second, it's an essential process in meeting regulatory compliance obligations. Third, it helps safeguard your organization's reputation. And finally, your company contributes to the global fight against money laundering and the heinous crimes associated with it.
In this article, we revealed four characteristics of high-risk customers.
And here is a bonus fifth: They may also appear on global criminal watchlists databases, such as Interpol's Red Notices. sanctions.io also screens these lists every day for our clients worldwide.
sanctions.io is a highly reliable, cost-effective solution for sanctions, PEP, and criminal watchlist screening. To learn more about how our sanctions, PEP, and criminal watchlist screening service works and to receive answers to all your queries regarding the sanctions.io API, integrations, and more. Book a free Discovery Call now.
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