Customer Risk Profiling as a Catalyst for Effective AML Compliance

It's super easy to break (into) an online business today given the billion-dollar cash flow on the web every single day. It's even possible to inadvertently support illicit financial transactions in such volumes of cash flow. (You'll be surprised to know that the estimated amount of money laundered annually is almost 5% of the global GDP i.e. 800 billion dollars!!)

It's easy to fall victim to money laundering unless you have stringent risk mitigation practices that detect and report suspicious activities.

Using data analytics tools to analyze customer data and monitor transactions is one. But integrating it with customer risk profiling is a second, more solid way. This combo vaccinates your business from money launderers.

In this article, we'll explore all about AML compliance and how customer risk profiling benefits you. But before we move directly to the ways of conducting customer risk profiling, let's quickly sift through the importance of AML (Anti-Money Laundering) compliance.

After all, why is it important for a business? Why is it important for you?

Importance of AML compliance

As we now already know the amount of money laundered annually, AML compliance is paramount. But, what does it refer to exactly?

Well, the arsenal of AML compliance consists of the rules, regulations, and policies that prevent money laundering.

Customer risk profiling is one of the critical tools in this compliance. It lets you understand the potential risks of each customer so that you're aware of potential threats from high-risk customers.

Now that we know about AML compliance, let's quickly look at how customer risk profiling is vital for effective AML compliance.

Customer risk profiling: its significance and key indicators

Customer risk profiling isn't an absolute necessity for AML compliance. Your institution won't necessarily break down or go bankrupt without it but it may lead to a higher risk of illicit financial transactions. Hence, you need specific indicators to know your customers.

Type or nature of customer
Transactional parameters
Peculiarities of the product services
Delivery channels involved

For example, with no adverse media or a non-pep (not politically exposed), the customer deems low risk. On the other hand, high net worth and non-residents pose a high risk. So, with customer risk profiling you can:

Tailor your AML strategies: Understanding the risk quotient of every customer opens a door to tailor AML strategies. For example, for high-risk customer profiles, you can set up real-time transaction monitoring while for other low-risk profiles, you can set up a less stringent policy. Moreover,
Allocate resources effectively: Since you have the risk quotient of each customer, you save up on spending extra money on resources and allocate them effectively.
Predict and preempt: With customer risk profiling, you can preempt potential dubious activities that prevent larger issues in the future.
Build better customer relationships: Now you may think constant monitoring of customer behaviors is disgraceful and would only deteriorate your equation with them. It's time to break this bubble. Understanding your customer isn't solely about flagging the potential threats, it's equally or more about improving your offerings based on their preferences, leading to stronger relationships.

Now that we have both AML compliance and customer risk profiling covered, it's safe to move to the ways!

Customer risk profiling acting as a catalyst for effective AML compliance

Your business centers around your customers as it must, however, it should also know about the potential threats these customers may pose. Let's start with how setting up an AML transaction monitoring system analyzes customer behaviors.

Set up AML transaction monitoring systems to analyze customer behaviors

Through diligent observation of customer conduct and careful transaction analysis, you could gauge the potential threats. How do you achieve this? By leveraging transaction monitoring rules from a trusted source. It'll help you avoid money laundering and other related crimes while maintaining a good business reputation.

What do these systems detect?

Anomalous transaction amounts
Sudden excessive transfers
Regular cash deposits or withdrawals
Transfers to high-risk authorities

Such continuous monitoring of customer transactions helps with identifying suspicious patterns and activities. You can easily and effectively track and analyze customer transactions and alert red flags or any anomalies.

The key features you should look for when leveraging an AML monitoring system for your institution:

Real-time transaction surveillance: To detect and identify potentially suspicious activities promptly, you wanna go for a system that allows real-time transaction surveillance. The benefit? You won't have to wait for a red flag to become more red before being aware!
Report suspicious activity: Sure, the system flags suspicious activity. What next? Go for a system that lets an analyst create a case out of such flagged records to determine whether it's malicious.
Tailor due diligence measures based on risk intensity: You don't want the business to get affected by low-risk customer profiles. This is why a system that lets you tailor due diligence measures based on the perceived risk of individual customers is what you need. Doing so enables streamlined processes for low-risk customer profiles.

You may already be aware of how custom software development boosts businesses; look up AML monitoring systems that are tailored to your needs.

Collaborate with other financial institutions for cohesive risk assessment

It only takes seconds (even less) for a mishap to multiply on the web.
So for instance, if your system has flagged a suspicious activity from a customer, it's quite possible other financial entities may also bear the brunt of it. To prevent this ripple effect or to minimize the potential loss, you need to collaborate with other financial institutions and build a more cohesive risk assessment landscape.

The next obvious question is how. The answer is - data sharing.

We don't mean sharing confidential customer data, that's a hard no. However, sharing data within regulatory confines can be a game changer for you and all other financial entities in the network. One suspicious activity in one entity might just be that missing piece of the puzzle for another entity.

Follow these steps for effective cohesive customer risk profiling.

Identify the risks
What are the unique risks associated with your industry? You can know these risks by connecting and interviewing with fellow experts within your network.
Standardize certain risk metrics
Sure, every financial institution will have its unique risk metrics. To create a cohesive risk assessment landscape, standardize specific key risk indicators.
Share
Once you have certain risk indicators fixed, share them with other financial institutions to come to a mutual set of indicators.
There, you have successfully created a cohesive plan for effective customer risk profiling!

Leverage automation and technology for accurate customer risk profiling

Customer risk profiling doesn't have to be a manual process. With the influx of huge volumes of data, leverage machine learning to identify patterns. Incorporate these patterns into the risk profiles then.

On talking about integrating AI and ML, Fred Wincher, co-founder and president of Maxcash (a financial broker in the U.S.), says, “ Last year, we added machine learning to oversee odd transactions. We have set our system in a way that flags any suspicious activity using structured and unstructured data. We also use pattern recognition technology to note potential money laundering activities and constantly update our algorithms as money laundering tactics evolve.”

How and which tasks can you automate with AI?

Automate risk scoring: The customer onboarding process is the entry point for a customer; integrate risk scoring models directly into the customer onboarding process to streamline operations. Plus, it ensures quick risk assessment.
Leverage cloud-based solutions for remote risk assessments: With cloud platforms, you can enhance data accessibility which allows remote risk assessment while also ensuring the teams across locations have access to data.
Establish feedback channels: Feedback from frontline staff on risk profiling tools ensures these tools are grounded and deem fit with your requirements. AI or even customer profiling, after all, isn't a set-and-forget tool. It requires constant feedback to ensure the institutions remain on the right course.

Implement these practices for effective AML compliance

The article will help you with ways to leverage customer risk profiling to prevent money laundering. However, which practice should you go for depends on a few factors, rather, than questions:

Has your organization been a victim of money laundering in the past?
Does your organization fall under an SME or it's large?
What's your budget? (Do you have enough to invest in AI tools?)

Answer these questions to start implementing customer risk profiling. For example, if you're an investment agency that's just started out, don't implement an AML monitoring system right away. (it'll be bad for your company's pockets.) Instead, invest in making payment gateways more secure to avoid any financial risk. Similarly, if you're an established entity, invest in the right AML monitoring system without giving it a second thought!

Remember, the money launderers await with their hawk-eye for a mishap from your end. it's your job to not give them any!