Key Elements of Customer Risk Profile

The factors to be considered by a Designated Non-Financial Business and Professions (DNFBPs) and Virtual Assets Service Providers (VASPs) while establishing a customer’s risk profile are discussed as follows:

• Customer Risk
  The customer risk profile must contain the customer risk as a parameter, on the basis of which the extent of ML/FT and PF risk posed by a customer can be assessed. The factors determining customer risk are as follows:
• • Organisation Structure: Whether the customer is a natural person or legal entity needs to be determined. If the customer is a legal entity or legal arrangement, it is essential to identify the Ultimate Beneficial Owner (UBOs) operating behind such an entity. The risks associated with the organisation structure must be taken into consideration while performing customer risk profiling.
  • Politically Exposed Person (PEP): The customer risk profile must contain details about whether the customer or their UBO/s or their close relatives or associates are classified as PEP. This will help allocate appropriate risk ratings to the customer.
  • Adverse Media: Whether there is any adverse or negative information about the customer that connects or associates such a customer with a crime, indicating involvement in predicate offence or ML/FT or PF. In cases where positive references are found, such customers are treated as high-risk.
  • Sanctions: The sanctions screening outcome forms an essential part of the customer risk profile, indicating whether the customer’s name appears in any of the sanctioned lists or not.
  • Changes in Behaviour: The customer profile must have a column where any fluctuation or change in customer behaviour can be noted to derive a holistic analysis of customer risk.
• Country Risk
  The customer risk profile must contain the country risk as a parameter, on the basis of which the extent of ML/FT and PF risk posed by the country of the customer can be assessed. The factors determining country risk are as follows:
  • Place of Residence: The country where the customer resides or has their business registered plays an important role in determining customer risk.
  • Place of Business: The country where the customer conducts business impacts the customer risk profile.
  • Connections with High-Risk Countries: Customer risk profiling must contain reference as to whether any connection of customer is there with a high-risk country.
• Product/Service Risk
  The customer risk profile must contain details as to the products or services forming part of the business relationship with a customer.
  • Nature of Product/Service: The customer risk profile must contain details as to the nature of the product or service for which the business relationship is established or is proposed to be established.
  • Dual-Use Goods: The customer risk profile must clearly state if the subject matter of the proposed or existing business relationship is a product that is classified as ‘dual-use goods’ as it would have major implications on the customer risk rating.
  • Easy to Transfer Ownership: Whether the subject matter of the proposed or existing business relationship is a product that can be easily transferred needs to be mentioned in the customer profile.
  • Easy to Move: Whether the subject matter of the proposed or existing business relationship is a product can be moved from one place to another easily needs to be mentioned in the customer risk profile.
• Transaction Risk
  The level of risk posed by conducting a transaction with the customer can be assessed through the transaction risk portion of the customer risk profile. The transaction risk can be derived on the basis of:
  • Nature of Transactions: The customer risk profile must take into account, the nature of transactions.
  • Transaction Frequency: The frequency of transactions must be recorded in the customer risk profile.
  • Transaction Volume: The volume of transactions must be discussed in the customer risk profile.
  • Transaction Patterns: The customer profile must take into consideration the pattern in which transactions are carried out.
• Delivery Channel Risk
  Various measures of customer onboarding must also form a part of the customer risk profile.
  • Face to Face: The customer profile must mention whether the customer onboarding is face-to-face or remote.
  • Involvement of Third Parties: The customer risk profile must mention whether any third parties are involved in referring to the customer.

Conclusion: Customer risk profiling is a result of the combination of factors as discussed. The level of impact each factor would have on the customer profile would vary as per the risk-based approach taken by the firm. Regulated entities will immensely benefit from customer risk assessment software, which helps maintain records and quickly adjust the risk level depending on the suspicion observed by the compliance team.