A key element of a strong AML/CFT compliance program is assessing and classifying customer risk in order to develop adequate controls based on identified risks; this is part of the risk-based approach to implementing said program. For regulated entities, Management is required to understand the relationship between the organization’s Customer Due Diligence procedures and its overall customer risk. In fact, it is a good business practice even for organizations that are not regulated, as this level of understanding of relationship will give an organization the appropriate insight to apply controls aimed at mitigating money laundering threats as well as other suspicious activity. In the U.S. this process was implemented with the enactment of Section 326 of the USA Patriot Act in 2003, whereby regulated entities are required to determine their customer’s money laundering and terrorism financing risk at account on boarding.
For identification and classification of risk, Management must take certain variables and factors into consideration prior to making a final determination concerning the outcome of a relationship—that is, whether to proceed with the relationship with or without certain restrictions and greater level of scrutiny, or to walk away from it. That determination must be based on variables and factors unique to each customer. In addition to other key factors and variables, Management must consider its customers’ expected transactional activity, economic activity, and the purpose and anticipated use of accounts. Therefore, the customer risk assessment must be thorough. Economic activity is a key variable, given that certain professions and industries have been designated as higher risk for money laundering. For example Professional Service Providers (PSP), such as lawyers and accountants have been identified as higher risk professions due to the potential layer of anonymity between the client and their professional service provider, as well as the potential for….
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