Identifying high-risk customers: key warning signs

For AML professionals, the ability to identify high-risk customers is not just a regulatory requirement; it's a critical step that can mean the difference between keeping your organisation safe from financial crime and becoming an unwitting accomplice to illicit activities.

With the complexities of modern financial systems and the ingenuity of those seeking to exploit them, understanding the warning signs early on has become essential.

This article breaks down the red flags you should be on the lookout for, helping you sharpen your due diligence process, and make smarter decisions when onboarding new clients.

Customer risk assessment: why is it important?

Minimising customer risk is a fundamental aspect of combating money laundering and terrorism financing. When onboarding new customers, it's vital to be aware of certain indicators that may suggest an increased risk.

Companies must establish a standardised process for customer onboarding, which includes thorough due diligence.

This involves gathering all necessary information and setting clear expectations from the outset. 

Such a process helps build a strong foundation for the customer relationship and can reveal potential issues early on. 

9 warning signs to watch for 

1. Customer credibility and integrity: Assess whether the customer has a history of complying with laws and regulations. Their honesty and reliability in financial reporting and management are critical factors.
2. Reluctance to provide information: Be cautious if a potential customer hesitates to share important documents or detailed information about their business operations. This reluctance can be a red flag.
3. Financial stability: Conduct a thorough assessment of the customer's financial health. This evaluation is necessary to gauge the risk of non-payment or other financial issues that could impact your company’s work and outcomes.
4. Unusual business practices: Methods that deviate from industry norms can be warning signs. Pay attention to unusual practices.
5. High-risk industries: Certain industries, such as gambling and cryptocurrency, are considered higher risk due to regulatory requirements or the nature of their transactions. Be extra vigilant when dealing with clients from these sectors.
6. Rapid growth or decline: A customer experiencing unusually rapid growth or decline in their business may require additional scrutiny.
7. Complex ownership structures: Complex business structures can sometimes be used to obscure ownership, which may indicate money laundering or other illegal activities.
8. Communication and agreements: Clear and well-drafted agreements and communication about expectations and responsibilities are crucial to avoid misunderstandings and conflicts.
9. Frequent changes in consultants: If a customer has frequently changed auditors or accounting consultants, it’s important to understand the reasons behind these changes. 

In conclusion

By monitoring these high-risk behaviours and histories early in the customer relationship, you can avoid potential problems later.

Strengthening your due diligence processes and staying informed about these warning signs will enhance your ability to effectively identify and manage high-risk customers.