Anti-Money Laundering (AML) programs are essential in combating financial crimes, including money laundering and terrorist financing. Various industries, particularly banking, finance, and gaming, utilize risk scoring factors to evaluate and manage the risk associated with their clients and transactions. Below, we delve into the top 10 AML risk scoring factors and explore their significance across different sectors.
Top 10 Risk Factors
1. Customer Type Rating
Overview
The customer type rating is a classification system used to categorize customers based on their profiles and potential risk levels. This factor considers various attributes, such as the nature of the business, the customer’s financial history, and their relationship with the institution.
Significance
Individual Customers: These may include low-risk individuals with straightforward financial needs or high-risk individuals with complex, high-value transactions.
Corporate Customers: Businesses can range from low-risk entities with transparent operations to high-risk ones involved in cash-intensive or high-value transactions.
Non-Profit Organizations: While generally considered low-risk, some may be scrutinized if involved in activities in high-risk regions or sectors.
Example
A retail customer with a stable job and consistent transaction patterns might be rated as low risk, whereas a newly established business dealing in high-value commodities could be rated higher risk.
2. Geographic Risk
Overview
AML geographic risk assesses the threat posed by a customer’s country of residence, business location, or the origin and destination of their transactions. This factor considers the political, economic, and regulatory environment of the regions involved.
Significance
High-Risk Jurisdictions: Countries with weak AML regulations, high levels of corruption, or ongoing conflict pose greater risks.
Low-Risk Jurisdictions: Countries with robust AML frameworks and stable political climates are considered safer.
Example
A customer from a country with stringent AML laws and low corruption levels poses less risk compared to one from a region known for money laundering activities.
3. Transaction Amount and Frequency
Overview
This factor examines the volume and frequency of transactions, flagging those that exceed expected norms based on customer profiles and industry standards.
Significance
Large Transactions: Single high-value transactions can be indicative of money laundering activities.
Frequent Transactions: A high frequency of transactions, especially those inconsistent with typical customer behavior, raises red flags.
Example
A small business that suddenly engages in multiple high-value transactions far exceeding its usual volume may warrant closer scrutiny.
4. Industry and Business Type
Overview
Certain industries and business types inherently carry higher AML risks. These include sectors where cash transactions are prevalent or where the value of goods is high and easily transferable.
Significance
Cash-Intensive Businesses: Restaurants, bars, and retail shops often deal with large amounts of cash, making them vulnerable to money laundering.
High-Value Goods Dealers: Businesses dealing in luxury items, precious metals, or real estate are also high-risk due to the high value and transferability of goods.
Example
A jewelry store dealing in high-value items might be subjected to stricter AML scrutiny compared to a grocery store.
5. Length of Relationship
Overview
The duration of the relationship between a customer and an institution is a significant risk factor. Long-standing relationships typically indicate lower risk compared to new or transient customers.
For additional information, view our blog overviewing the impact customer profiles and relationships have on customer risk.
Significance
Long-Term Clients: Customers with a long history and stable transaction patterns are generally seen as lower risk.
New Clients: New customers, especially those with substantial initial transactions, are considered higher risk until a transaction history is established.
Example
A customer who has maintained a savings account for ten years with consistent activity is considered less risky than a new customer with no financial history.
6. Adverse Media and Sanctions
Overview
This factor considers any negative information or sanctions related to an individual or entity, obtained through media reports, regulatory filings, or watchlists.
Significance
Adverse Media: Reports linking customers to criminal activities, fraud, or other illicit activities increase their risk rating.
Sanctions Lists: Customers appearing on sanctions lists or involved in countries under embargoes are flagged for heightened scrutiny.
For additional information, view our blog overviewing the importance of sanctions compliance.
Example
A customer named in news reports for involvement in financial fraud will be rated higher risk compared to one with no such associations.
7. Politically Exposed Persons Status
Overview
Politically Exposed Persons (PEPs) are individuals holding prominent public positions or those with significant political influence. Due to their position, they are at a higher risk of involvement in corruption or bribery.
Significance
Direct PEPs: Individuals currently holding or having held significant public office.
Indirect PEPs: Family members or close associates of PEPs also fall under this category.
Example
A senior government official or their close relative is considered high risk and subject to enhanced due diligence.
8. Regulatory Reporting Risk
Overview
This factor evaluates the risk associated with regulatory reports filed against an entity or transaction. Such reports may indicate potential or actual involvement in illicit activities.
Significance
Suspicious Activity Reports (SARs): Filed reports can highlight transactions or behaviors inconsistent with normal activities, suggesting possible money laundering.
Regulatory Actions: Past regulatory actions against a customer also influence their risk rating.
Example
A business with multiple SARs filed against it will be rated higher risk compared to one with a clean regulatory record.
9. Country Risk
Overview
Country risk evaluates transactions involving countries with high risk or under international embargoes. This factor overlaps with geographic risk but focuses on specific transaction-related risks.
Significance
Embargoed Countries: Transactions involving countries under international embargoes are flagged for enhanced scrutiny.
High-Risk Countries: Countries identified as high risk for money laundering or terrorist financing activities are closely monitored.
Example
A transaction involving a country under international sanctions will trigger a higher risk rating compared to one involving a low-risk country.
10. Anomalies in Transaction Patterns
Overview
Unusual or sudden changes in transaction behavior that deviate from regular patterns are critical indicators of potential money laundering activities.
Significance
Behavioral Deviations: Significant changes in transaction size, frequency, or type can indicate laundering activities.
Unexpected Transactions: Transactions that do not align with a customer’s known business activities or financial history are suspicious.
Example
A dormant account suddenly engaging in large international transfers would be flagged for further investigation.
Combining Various Risk Factors into A Business-Specific Risk Scoring
AML risk scoring factors play a crucial role in detecting and preventing money laundering activities across various industries. By understanding and monitoring these factors, institutions can better protect themselves and the broader financial system from illicit activities. Implementing robust AML programs and continuously updating risk assessment criteria in response to evolving threats is essential for maintaining financial integrity and security.
How Alessa Streamlines AML Compliance
Alessa provides a fully integrated, end-to-end AML compliance software made up of a variety of modules, which can be utilized as stand alone solutions. These include:
- Risk Scoring Software
- Sanctions, Watchlist and PEP Screening
- Transaction Monitoring and Screening
- Automated Regulatory Reporting
- Identity Verification and KYC Compliance
- Enhanced Due Diligence Reports
- AML Case Management
Contact us today to learn more about how any of the above solutions can improve your compliance program’s effectiveness and cost-efficiency.
