Customer Due Diligence – A Risk-based Approach to Identify Red Flags

Financial companies can have the potential to experience a lot of economic growth. However, there is a chance of fraud as well. Cybercriminals prefer to exploit the area for their malicious goals. Banking service providers must spend millions of dollars in case of non-compliance with KYC & AML regulations. The decision regarding revolutionary digital solutions, such as customer due diligence and KYC verification, should be made by experts to address the challenges above. This is necessary to discourage identification theft, money laundering, and terrorism financing cases.

Complete Procedure Behind Risk Assessments

The main goal behind fraud risk evaluations is to deal with loopholes in the defence mechanisms of any enterprise towards all types of scams. Internal fraud involves the misappropriation of assets, whereas exterior scams involve data privacy breaches and Account Takeover Fraud (ATO).

Perpetrators usually target the loopholes in the interior structures of a corporation, and banks are the most affected by these attacks. Therefore, implementing a thorough KYC verification and customer due diligence in banks is obligatory to discover shortcomings in protection systems and calculate risks.

Service providers can personalise risk evaluation structures per modern-day industries’ needs and operations. The management teams responsible for their respective departments must undergo customer due diligence to assess the company’s vulnerability to fraud.

Certainly, there will usually be changes in interior and exterior business surroundings, and professionals should generally operate risk assessments for ultimate security. The modern customer due diligence checklist and fraud chance evaluation ought to address four essential areas:

  • Checking Asset Misappropriation

Hackers target businesses for their products, cash, and other assets. The term “misuse of assets” covers a greater scope than is usually considered. Employees who utilise company equipment for personal gain actively steal supplies.

  • Analyse Financial & Non-Financial Reporting

Several inconsistencies between the non-financial and economic statistics can result in inside fraud. The administration can commit crimes by overstating yearly revenues, employer assets, and profits. Risk evaluation and customer due diligence structures can precisely reveal enterprise overall performance indicators. For instance, the revolutionary process can document the number of clients’ accounts, stores, and bank statements.

  • Identifying Illegal Acts

Performing audits with the KYC methods can assist experts in maintaining records related to scams and fraud a business commonly faces. In this light, executing customer due diligence processes can assist agencies in discovering and mitigating fraud in real-time.

  • Performing Risk Scoring for Customers

Risk scoring empowers companies to discover risky clients that can threaten businesses. A risk scorecard serves two necessary purposes. It is a:

  • The structure has the necessary information on clients for the risk evaluation process.
  • A model that inputs all the data and converts it into a score.

The scorecards can exchange relying on organisations because all firms have numerous clientele. In this light, the risk scores of clients are additionally different. Besides KYC data, risk scorecards must consist of facts on the sources of funds, the nature of business partnerships, & the PEP’s status.

What are the Risk Scoring Factors?

The following part highlights several risk-scoring factors that authorities should hold in thought even as performing customer due diligence:

  • Jurisdiction-Based Risk

Businesses that function in high-risk areas must validate the identities of their clients in depth. For this reason, experts must enforce enhanced due diligence tactics and not customer due diligence for danger evaluation.

  • Source of Funds

The risks involved with handling money can greatly affect modern businesses. For companies seeking to build strong relationships with high-risk consumers, it is crucial to validate all sources of income. This approach allows businesses to create a robust risk profile to safeguard their operations.

  • Watch List Risk

Entrepreneurs must be cautious about customers appearing on global watchlists and financial crime databases, which poses a significant warning sign. Onboarding such high-risk clients can be harmful to corporations. Therefore, it becomes crucial for organisations to screen their consumers using customer due diligence and risk assessment systems. This proactive approach helps protect businesses from potential risks and ensures a safer business environment.

  • Legal Structure & Ownership Risk

The risk associated with a client’s legal structure depends on whether it is a private or public entity. A system examines the customer’s status to assess this risk and then searches for relevant legal information. This approach helps business experts accurately create a risk profile for the entity, ensuring they clearly understand the potential risks involved.

Performing Ongoing Supervision for Gathering Valuable Risk Insights

Modern-day companies face significant risks from Politically Exposed Persons (PEPs) and money launderers, impacting their operations in various ways. To prevent fraud, all organisations must assess the risk scores of new clients during the customer onboarding process. Experts must thoroughly examine high-risk consumers’ credentials to ensure compliance with Anti-Money Laundering (AML) obligations. Ongoing monitoring of AML control procedures is essential for dealing with high-risk entities. Experts have access to various data sources, such as PEPs lists, global watchlists, and financial crime databases, which conveniently aid in screening clients and creating risk profiles. By implementing these measures, businesses can better protect themselves from potential risks and maintain a safer business environment.

Concluding Remarks

Collaborating with third-party service providers can benefit industries adopting Identity Verification (IDV) and anti-money laundering solutions. This partnership enables corporations to comply with international regulations and helps them validate customers’ identities using real-time data analysis. By implementing customer due diligence, businesses can create risk profiles and calculate scores to prevent fraud effectively. These innovative solutions deliver high-quality results instantly, providing essential protection to organisations against external threats and attacks.

Leave a Reply

Your email address will not be published. Required fields are marked *