A Ready Checklist for Evaluating Geographic Risk During Client Onboarding

A Ready Checklist for Evaluating Geographic Risk During Client Onboarding

During the Customer Risk Assessment (CRA) process, many factors need to be considered to ensure that financial crime risks that a customer may pose to the Regulated Entity are comprehensively assessed and addressed. This contributes towards building an accurate customer risk profile, allowing Regulated Entities in UAE to take a risk-based approach towards managing Money Laundering (ML), Terrorism Financing (TF), and Proliferation Financing (PF) risks.

Country-related ML/TF and PF risk is one such factor. In this infographic, we have discussed the various parameters that can be adopted by Regulated Entities to assess the country-specific ML/TF and PF risks emanating from a customer.

This checklist can be readily utilised by the Regulated Entity to enhance its CRA methodology, while giving adequate weightage to country-related ML/TF and PF risks. A Regulated Entity can rely on this checklist, once the Know Your Customer (KYC) details are collected to identify the country or countries in which the customer holds nationality and usually conducts business transactions.

The parameters to be factored while assessing country risk posed by a customer are detailed in the checklist below:

  • Whether the country in question has been included by the Financial Action Task Force (FATF) in its Blacklist or Grey List?
  • Whether the country has been sanctioned by the UN, or are there UN embargoes against the country?
  • Whether the country has significant levels of corruption, bribery or criminal activity?
  • Whether the country has political or economic instability, or an ineffective rule of law?
  • Whether the country is a Conflict Affected and High Risk Area (CAHRA) country?
  • Whether the country has been assessed by credible sources to present risks of ML/TF and PF? These credible sources include sources such as FATF Mutual Evaluation Reports (MER), Basel AML Index, KnowYourCountry Ratings, etc.
  • Whether the country has known associations with TF conflict zones and their bordering countries?
  • Whether the country has been identified as a tax haven?
  • Whether the country is known to have ineffective AML/CFT/CPF regulatory framework?
  • Whether the country is known to be a haven for production or transnational shipment of illegal drugs?

Responses to these questions will indicate the level of ML/TF and PF risks the client poses to the Regulated Entity due to their country of nationality or residence or business operations or country in which the entity is headquartered or incorporated in case of a client being a legal entity or legal arrangement.

Some parameters should be given more weightage than others. For instance, client from an FATF Blacklisted country would pose a higher ML/TF and PF risk than a client from FATF Grey listed country. In fact, when dealing with clients from high-risk countries, i.e., FATF Blacklisted country, filing High-Risk Country Report (HRC) or High-Risk Country Activity Report (HRCA) is compulsory.

Based on responses to these questions, Regulated Entity can formulate a probable scenario that gives clarity as to what kind of further due diligence measures must be adopted.

Let’s discuss a practical example to understand how these parameters can be incorporated into the CRA process of the Regulated Entity.

Consider a Regulated Entity ABC. During the course of its operations, it is approached by a client PQR for engaging in business. When conducting Know Your Customer (KYC) for the client, it was found that that the client PQR was born in Country Z, while his nationality is in Country Y. While conducting CRA for the client PQR, Regulated Entity ABC can use the parameters given above to assess the ML/TF and PF risks associated with Country Z and Country Y. Regulated Entity then needs to assign adequate weightage to these assessed risks. For example, if the client has no connections with the country of his birth and is solely connected with the country of his residence, i.e., the country of nationality in this case, then ML/TF and PF risks emanating from Country Y should be given more weightage.

Assessing the ML/TF and PF risks emanating from the countries the client is associated with, along with other risk factors such as customer risk factors, product/service related risk factors, delivery channel related risk factors, etc., ensures for a comprehensive CRA. We have given a detailed list of factors to consider here.

Using the CRA results, Regulated Entity ABC should build a customer risk profile, categorising PQR in accordance with the level of ML/TF and PF risks he poses to the Regulated Entity. On the basis of this, Regulated Entity ABC can apply a risk-based approach to choosing the most appropriate AML/CFT/CPF controls for the customer.

Factoring Geographic Risk During Client Onboarding: Final Thoughts

Factoring in geographic or country-related ML/TF and PF risks contributes to building an accurate customer risk profile. A comprehensive CRA process equips Regulated Entities with the insights needed to adopt a risk-based approach to adopting the most appropriate AML/CFT/CPF measures to manage the assessed risks.

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