In the world of compliance, it is crucial to identify and address high-risk areas effectively. Many of these risks stem from high-risk clients, making it a top priority for regulated entities to take proactive steps in managing these risks. By understanding and focus on high-risk areas, organizations can prioritize their compliance efforts and implement targeted measures to reduce potential risks.
In this article, we will examine four high-risk areas that regulated entities need to condider, highlighting the importance of proactive risk management and providing practical insights to assist regulated entities in navigating this critical aspect of compliance.
Here are the steps you need to follow to identify high ML/TF areas:
1. Identify Politically Exposed Persons (PEPs)
One of the most important high-risk areas that entities need to focus on are PEPs. Politically Exposed Persons (PEPs) refer to individuals who hold prominent public positions or have significant influence in the decision making of governments, political parties, or international organizations.
While not all PEPs are involved in illicit activities, their prominent status and access to power can pose certain risks such as:
- Corruption and bribery: PEPs may be susceptible to corruption and bribery due to their power and decision-making powers. They may be offered bribes in exchange for favorable treatment or to influence policies, contracts, or other government decisions.
- Money laundering: PEPs may attempt to hide the proceeds of bribery and corruption with the use of various money laundering methods, including the establishment of shell companies in various high-risk countries or countries with high secrecy levels to conceal the true ownership of these companies and their assets.
- Regulatory and reputational risks: Companies and financial institutions that have business relationships with PEPs may face regulatory and reputational risks. Compliance with anti-money laundering (AML) and know-your-customer (KYC) regulations becomes crucial to avoid penalties, fines, or damage to their reputation.
Compliance tip: Check every customer on onboarding and all your clientele at regular intervals against PEP lists. Ensure that the screening tool you are using is up to date with the latest PEP updates.
2. Identify Customers with Links to High-risk Countries
Another important high-risk area is customers that have links with high-risk countries. To understand the geographical risk of the client and to be able to identify links with high-risk countries we need to understand among others the:
- Country of the establishment of customer
- Country where the beneficial owner is based.
- Country/place of business of the customer or the beneficial owner
- Country/ies where the beneficial owner has personal links.
- Country/ies where funds are generated or received from or sent to.
Compliance tip: To obtain information on the anti-money laundering and countering financing of terrorism (AML/CFT) measures of countries, refer to the mutual evaluation reports conducted by either the Financial Action Task Force (FATF) or one of the nine FATF-style regional bodies. These reports provide valuable insights into a jurisdiction’s efforts and effectiveness in combating money laundering and terrorist financing.
3. Identify Complex or Unusually Large Transactions
Identifying complex or unusually large transactions is a critical aspect of mitigating high-risk areas for regulated entities. These transactions can be indicative of potential money laundering, fraud, or other illicit activities.
Complex and unusually large transactions can be characterized as those transactions that deviate from the economic profile or known business activity of a client. These transactions are typically outside the scope of regular and expected financial activities, raising concerns about their legitimacy and potential risks.
For example, if a client with a modest income suddenly engages in a multimillion-dollar transaction or if a business primarily involved in retail suddenly starts conducting large-scale international money transfers, these would be considered complex and unusually large transactions that warrant further scrutiny and investigation.
Understanding the risks associated with such transactions is essential for entities to implement effective measures and safeguard against financial and reputational harm.
Compliance Tip: Implement robust transaction monitoring systems that can flag and analyze transactions that deviate significantly from the client’s established economic profile or known business activity. Regularly review and update transaction monitoring rules and parameters to ensure they are aligned with the evolving risk landscape and regulatory requirements.
4. Identify Clients Designated as High-Risk under National Regulations
In compliance with national regulations, it is crucial to identify clients who are specifically designated as high risk. These designations may be based on various factors outlined in the regulatory framework, such as the client’s industry, geographical location, or previous suspicious activities.
By thoroughly understanding and adhering to these regulations, organizations can enhance their risk assessment processes and implement appropriate due diligence measures to mitigate potential risks.
Compliance Tip: Establish a robust system to regularly review and update the list of clients designated as high risk under national regulations. This can involve leveraging advanced risk assessment tools, conducting periodic risk assessments, and staying updated with changes in the regulatory landscape.
Effectively identifying and managing high-risk clients not only ensures compliance with legal requirements but also safeguards the integrity and reputation of the regulated entity.
By proactively addressing risks associated with high-risk clients, complex transactions, and clients from high-risk countries, organizations can enhance their compliance efforts and safeguard their integrity.
Through continuous vigilance and a commitment to compliance, entities can build a solid foundation for sustainable growth and success in the challenging regulatory environment of today and tomorrow.