What Are High-Risk Customers and How Can You Spot Them?

Getting more customers online can sound great, right? But is it always a win for your business? Our guide here is meant to help you spot and understand certain types of customers who could bring trouble down the line, which are called high-risk customers.

Financial institutions, like banks, have rules they need to follow, and they have to be careful with customers in general, but specifically, those who might be more prone to fraud and money laundering. This guide provides examples of high-risk customers, what they look like, and how to spot them. But first, let’s talk about what high-risk customers exactly mean.

Who are High-Risk Customers?

High-risk customers are people or businesses that bring more risk to a business or financial institution. This risk can come from different factors, maybe they’ve got a financial history that was not stable, or they’re more likely to be involved in illegal actions.

Banks and other financial institutions are required by law to know about high-risk customers for many reasons. One big reason is that they must comply with AML regulations, otherwise, they would be penalized. So, what’s AML compliance?

What is AML Compliance?

AML is the abbreviation for Anti-Money Laundering; these are laws and regulations that financial institutions and other businesses must follow, mainly to avoid facilitating illegal actions.

10 Common Types of High-Risk Customers

High-risk customers fit into different groups based on what they do or their background, and high-risk clients are often labeled as high-risk if they might bring financial losses or if there’s a chance they’re linked to illegal actions. Here are 10 common types:

1. Money Service Businesses (MSBs): These are businesses like currency exchanges or money transfer services. They often see a lot of money flowing through, so there’s a risk they could be used for shady financial actions.

2. Politically Exposed Persons (PEPs): PEPs are persons who are currently or have been previously in powerful positions, like politicians or high-ranking government officials. They’re risky because they might be more open to corruption, bribery, or any other forms of financial misconduct.

3. Non-Profit Organizations (NPOs): Some non-profits can be risky, especially if they work in places known for weak financial rules or if there’s worry about funds being used incorrectly.

4. Correspondent Banking Relationships: When one bank helps another bank with services, it’s called correspondent banking. This can be risky if one of the banks is from a high-risk country.

5. High-Volume Cash Businesses: Businesses that work primarily with cash, like casinos or jewelers, are considered high-risk because cash is harder to track.

6. Cryptocurrency and Virtual Asset Service Providers (VASPs): With crypto becoming more common, businesses that deal with it are high-risk, as digital money can offer privacy that’s attractive to criminals.

Read more: Cryptocurrency Transaction Monitoring: Regulations, and Best Practices

7. Customers with Poor Credit History: People or entities with a shaky financial past, like late payments or loan defaults, are seen as riskier when it comes to giving credit.

8. Shell Companies: These are companies that don’t do much business but might be set up to hide the real owners or move money around. They’re often used in money laundering.

9. Foreign Correspondents and Transactions: Customers who deal internationally, especially in places known for weak financial rules, may bring added risk.

10. Sanctioned Individuals or Entities: People or companies that have restrictions set by governments or global bodies are considered high-risk because working with them can be legally tricky.

Why It Matters to Spot High-Risk Customers

Ever wonder why banks and financial businesses try to spot high-risk customers? Here are 8 reasons why it's so important:

1. Stopping Money Laundering and Financial Crimes

High-risk customers are often linked to crimes like money laundering, and fraud. Spotting these customers helps banks take steps to block these actions and keep the financial system secure.

2. Following Anti-Money Laundering (AML) Rules

Regulators require financial institutions to have strong anti-money laundering programs. Finding high-risk customers helps these businesses follow AML rules, which can help them avoid fines and legal consequences.

3. Avoiding Terrorist Financing

Some high-risk customers may funnel money to support terrorism. By identifying these people, banks can help stop funds from reaching these groups and support safety on a bigger scale.

4. Guarding Against Fraud

High-risk customers may also try to cheat the financial institution or its clients. Spotting them early allows the institution to proactively keep its assets safe.

5. Protecting Reputation

Staying on top of these customers, financial institutions maintain trust with clients, investors, and the public.

6. Making Due Diligence Stronger

High-risk customers need extra attention. This means a closer look at their transactions and background, which helps the bank understand any risks they might bring.

7. Managing Risk

Spotting high-risk customers allows the bank to use risk assessment tools, helping to avoid losses down the line.

8. Fulfilling “Know Your Customer” (KYC) Requirements

Knowing your customers is a big part of anti-money laundering. Spotting high-risk people means the bank has a full understanding of who they’re dealing with, which helps avoid any shady activities.

Red Flags and Warning Signs of High-Risk Customers

Watching out for these red flags can help manage risk and meet anti-money laundering (AML) and know-your-customer (KYC) rules. Here are the 12 most common red flags that show a customer might be high risk:

1. Unusual Transaction Patterns: Large, fast, or frequent transactions that don’t fit a customer’s normal activity might be a sign of money laundering.

2. Inconsistent Customer Information: When a customer’s details don’t match up, like different addresses or ID numbers, this could be a warning sign.

3. High Cash Use: Heavy use of cash, especially in industries where digital payments are more typical, can signal a higher risk of money laundering.

4. Relatives of Politically Exposed Persons (PEPs): Customers with family ties to powerful political figures might be more likely to engage in corruption or bribery.

5. Geographic Risk: Customers from areas known for crime, corruption, or weak rules are often seen as higher risk.

6. Unexplained Wealth: Big jumps in wealth without a clear reason may suggest illegal activities.

7. Unclear Business Activities: Customers with complicated business setups, unclear ownership, or little transparency may seem suspicious.

8. Frequent Changes in Ownership: If a business keeps changing hands, it could be trying to hide the real owners and their activities.

9. Use of Shell Companies: Some high-risk customers use shell companies (that don’t do much business) to hide the origin or destination of money.

10. Negative Media Coverage: If a customer has been in the news for bad reasons, involved in lawsuits, or past financial crimes, this is a major red flag.

11. Working in High-Risk Industries: Businesses in sectors known for money laundering, like virtual currency exchanges, carry higher risks.

12. Lack of Proper Documentation: Customers who can’t or won’t provide ID, business permits, or financial records may be at high risk.

How to Spot High-Risk Customers with FOCAL

In this part, we’ll look at three ways the FOCAL AML Compliance Suite helps banks and financial businesses find high-risk customers.

Checking the PEPs List: When bringing on new customers, the FOCAL platform makes it easy to check if they are high-risk. It continuously screens and monitors customers by using a huge database that includes over 1,300 real-time lists of global sanctions, Politically Exposed Persons (PEPs), and negative media reports.

Keeping an Eye on Large Deposits: FOCAL helps financial institutions watch transactions closely. It allows businesses to track big deposits to make sure they follow anti-money laundering (AML) rules. For transactions that go over a certain limit, FOCAL checks and logs them so they can be reviewed.

In the FOCAL platform, you can change this limit easily. While it’s not a good idea to block these transactions automatically, having the information ready for a manual check is helpful, especially when filling out a Suspicious Activity Report (SAR).

Customizable Risk Rules: FOCAL lets businesses create their own rules based on what risks matter most to them. This flexibility helps institutions line up their rules with what is required in their industry, making sure they can assess risks in a way that fits their specific needs.

With the Rule Builder, a tool that adapts to different needs, businesses can better check for risks linked to new customers. By tweaking these rules, they can stay compliant and make smarter choices.

Conclusion

Finding high-risk customers is important for keeping a business safe. Financial institutions need to take steps to spot risks and understand behaviors that might signal a high-risk customer.

The red flags we’ve highlighted above, along with platforms like the FOCAL platform, show how serious the industry is about fighting against illegal activities.

FAQs

Q1. What Makes a Customer High-Risk in Banking?

High-risk customers in banks often have unusual transaction patterns, shady financial backgrounds, or work in businesses that are prone to illegal activities.

Q2. How Do Banks Find High-Risk Customers?

Banks look for high-risk customers by doing thorough checks on customers, monitoring transactions for odd behaviors, and screening against global sanction lists and PEP databases.

Q3. What Does User Risk Mean in Banking?

User risk in banking refers to the chance that a customer might do something that leads to loss of money, fraud, or not following rules.

Q4. Which Industries Have More High-Risk Customers?

Some industries, like financial services, gambling, cryptocurrency, and international trade, often have more high-risk customers because of the likelihood of illegal activities.