HOW TO ENHANCE KYC AND CDD FOR HIGH RISK BANKING?

Increasing operating complexity in banks creates both opportunities and risks. Cyber threats continued check and wire fraud incidents and other operational risks require increased risk management.

Financial institutions can identify high risk banking customers through factors like unusual transaction patterns and participation in industries prone to illicit activities. They can also mitigate risk by having a chargeback mitigation plan in place and offering higher fees and rolling reserves.

CUSTOMER DUE DILIGENCE

Using a cutting-edge KYC/CDD solution, banks can flag suspicious transactions and report them to their regulators. To prevent money laundering and other financial crimes, it’s essential to identify and verify customer identity, perform thorough background checks, and continuously monitor transactions to detect suspicious activity.

The best way to do this is through customer due diligence (CDD). CDD involves identifying and verifying the identity of customers, assessing their risk levels, and monitoring ongoing activities on a risk basis.

CDD requires a comprehensive assessment of an individual’s risk profile, including verification of identity, understanding the nature and purpose of their relationship with you, checking for ties to sanctioned countries, and checking whether they are a politically exposed person (PEP) or an employee of a government or entrusted with a prominent public function. PEPs are at a higher risk of engaging in bribery and corruption. The CDD process can also include checking for sanctions and criminal records. This information is then used to inform onboarding and ongoing monitoring processes.

ENHANCED DUE DILIGENCE

Enhanced due diligence goes beyond standard KYC and CDD requirements for high-risk individuals and businesses. It involves a more thorough risk assessment of a customer’s identity and transaction history, which includes looking for red flags like illegitimate wealth or suspicious financial inconsistencies. This is a critical component of AML compliance, and it’s especially important for high-risk categories like Politically Exposed Persons (PEPs) and businesses with complex ownership structures that may signal underlying risks.

Identifying and monitoring high risk banking customers allows financial institutions to comply with AML regulations, prevent criminal activity, and avoid legal consequences. EDD also helps organizations build trust with their clients, stakeholders, and the public. For example, identifying PEPs can help companies avoid bribery and corruption, as well as other forms of fraud that could damage their reputation. It can also help them avoid dealing with sanctioned countries and other regions that pose a higher risk of money laundering or terrorist financing.

CUSTOMER MONITORING

Identifying high risk banking customers is key to preventing money laundering, terrorist financing, and other illicit activities. It also ensures compliance with BSA/AML regulations and prevents legal penalties and financial losses. Identification can be achieved by implementing enhanced due diligence processes, such as identifying and verifying beneficial owners for corporate clients and ongoing monitoring to determine whether transactions match the expected purpose and behavior of a business.

The process begins by collecting details about a client, such as their name, date of birth, and address. From there, institutions analyze information to assess their risk level and categorize them based on their overall risk weightings. Those considered high risks are subject to extra due diligence and continuous monitoring, which may include visiting their physical business location to ensure that the operational location matches up with the addresses provided. This is particularly important for businesses that deal in a large volume of cash, such as gold dealers and jewelry companies.

MERCHANT ACCOUNTS

Regardless of the industry type or chargeback rate, all businesses face inherent risks. As a result, some merchant services providers will consider an applicant high risk if their credit history or business model raises concerns. These providers might request detailed documentation, including business licenses, bank statements, and transaction history.

Enhanced due diligence may also be required for high risk banking customers. For example, significant increases in wealth or income, unexplained transactions, and complex ownership structures can raise suspicions of suspicious activity. Similarly, businesses located in regions with higher levels of financial crime, corruption, or weak regulatory controls are often considered high risk.

CONCLUSION

Look for a provider that specializes in your industry and understands the unique challenges you face. These providers are better equipped to offer tailored solutions and ensure your account stays in good standing despite the inherent risks. They might require a higher deposit minimum, have more stringent fraud detection processes and chargeback prevention protocols, and may impose higher fees for certain transactions.