It is a known fact that no business is free from risk, be it a small-scale industry or a large corporate wheel, everyone needs to pertain to the risk that comes with the conglomeration of returns and profits.
Now when we talk about banking companies, this industry has a two-way street for the risks involved and therefore is a highly regulated sector to curb the issues such as fraud, impersonation, money laundering, etc. Also, with the government being the watchdog now, the regulations have become stricter and have proved to be effective in the past few years.
Enhanced due diligence
It shall be interesting to note that the companies that now fall under the AML/CTF regulations are required to conduct enhanced due diligence measures so that they can comply with the standards that are targetted to prevent cases of money laundering as well as terrorist financing.
This enhanced due diligence or EDD is a process that helps the bank to verify their customer identities and their sources of funds. This is done under a risk-based approach to scanning a customer’s KYC. This enables financial institutions to be cognizant of a high-risk customer category across the globe.
Risk Factors involved in Enhanced Due Diligence
These companies are therefore required to assess the risk factors that may be related to any suspicious customer activity. Usually, such activities may stem from high-risk regions, countries, products and services, and some very specific transactions.
Let us identify the three main categories of the risk factors that the specified companies are required to consider to mitigate and avoid the occurrence of any such activity:
- Customer Risks: These are the indicators that are associated with the end customers. These customers may be an individual or a corporate. The customer risk that can be played off and requires an enhanced due diligence process includes:
- If it is a cash-intensive business.
- If the customer is a close relative of a PEP.
- In case when customers are non-residents.
- In case the client is an asset-holding company or a dormant company with no actual business.
- When the customer has a nominee shareholder of a company or when shares of such company have been issued in a bearer form.
- Country or Geographical Risks: These are indicators of where the main place of a business in a particular country is and what the subject to the regulatory authority in that country is in terms of financial and credit companies.
Following scenarios that come under the purview of geographical risk factors that may require EDD:
- Countries that are under sanctions and are considered by the Secretary of State the sponsors of international terrorism.
- Countries with significant strategic deficiencies in terms of their money laundering countering regimes
- Countries that are not members of the Financial Action Task Force (FATF)
- The European Commission identifies the high-risk third countries as per their strategic deficiencies on AML/CTF.
- Locations where designated terrorist organizations are operated and being funded.
- Other Risk Factors: Risk factors such as products, services, trade, etc are the indicators related to the complex sections in a business that is in association with the customer. In these cases, the companies must consider risks that may be related to the transparency and complexity levels as well as refer to the value or size of a product, service, or even a transaction.
As we gather, the EDD procedures may vary as per the nature and also the risk profile of its customers. These can develop in any form that may depend on a distinct situation. Therefore, these enhanced verification processes must be in proportion to significant risk levels that can be identified.