Once again, hello readers! Welcome back for Part 3 of ‘Optimising Customer Risk-Rating Methodologies’ (CRRM). Today, we shall discuss ‘Red Flags’ – the final, pivotal element of an optimal CRRM.
Optimal CRRM Considerations
All High-Risk Factors or Red Flags should be assessed independently based on their merits on a case-by-case basis, and they should not automatically trigger a Money Laundering (ML)/Terrorist Financing (TF) risk score of High Risk.
A firm should determine whether a manual uplift of the Anti-Money Laundering (AML) Risk Rating is required based on the presence of ‘Red Flags’ or High-Risk Factors. When High-Risk Factors, other than PEPs, have been identified during the Know Your Customer (KYC) document collection or screening processes, these must be considered and weighed along with all the other risk factors relevant to that customer. Then it is determined, as to whether to recommend the upliftment of the overall risk rating.
Red Flag Examples
1) Sanctions: There are two types of sanctions that should be considered:
Direct Sanctions: If the Customer is associated with a sanctioned country (direct sanctions connection), the overall Customer Risk Rating will be defaulted to High Risk Restricted and is escalated to Compliance/ Money Laundering Reporting Officer (MLRO)/equivalent local officer. No trading would ever be permissible with a client who is directly sanctioned.
Indirect Sanctions Nexus: An indirect sanctions nexus should be treated as a Red Flag and risk should be assessed separately considering multiple factors, such as the nature of the relationship, and the specific sanction type, such as trade, financial (sectoral), or specific personal sanctions.
2) Adverse Media: Adverse media ‘hits’, which are generated during the Customer screening process will need to be analysed according to whether they are both Relevant and Material. In the case of a Red Flag, Enhanced Due Diligence (EDD) will need to be undertaken, and risk mitigation is possible only after a thorough examination of all the risk factors linked to the Customer as a whole. Where the risk cannot be sufficiently mitigated, the overall Customer ML/TF risk can be increased, or the Customer deemed to fall outside of the Firm’s risk appetite in which case the relationship will be terminated.
Final Risk Rating Assessment
The final customer Risk Rating should therefore be adjusted/finalised after the performance of steps/considerations above.
How Can Lysis Help?
…check our Part 4!