A Customer Risk Rating Methodology (CRRM) is a pivotal and central policy for any Financial Institution. An optimal CRRM will allow a firm to assess the Money Laundering (ML)/Terrorist Financing (TF) risks associated with their customer base and employ risk-sensitive Customer Due Diligence (CDD) measures in keeping with the tenets of the Risk-Based Approach. Although primarily driven by jurisdictional Money Laundering regulations, there are many other considerations to an effective CRRM. To adequately assess the ML/TF risk associated with a Customer base, firms must identify the underlying risk factors and risk weight each factor in accordance with the magnitude of its impact on the overall risk categorisation.
What are the key considerations?
1) Initial Anti-Money Laundering Risk:
This would include:
Customer Type: This would encompass whether or not a customer/client is listed/regulated and possible reputational comfort that can be taken with well established/known companies and individuals;
Industry Risk: Permitting the client is an entity, the nature and inherent risk of the industry in which it operates needs to be considered; and
Country Risk: Country risk is one of the important risks from a ML/Terrorist Financing (TF) perspective. For many, this would have one of greatest weighting in an AML Risk Rating Methodology. Country risk lists be drawn up to reflect the globally accepted ML/TF risks associated with all jurisdictions and these countries are then allocated a risk level or weighting. Key country risk lists to consider would be Basel Index, Financial Action Task Force (FATF), European Union (EU), UK Treasury (including the MLR17), the USA Office of Foreign Assets Control (OFAC) and the Corruption Perception Index.
For further information check out Part 2!