Elements of Customer Risk - Products & Services, Activity Patterns and Behaviors
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The document outlines the elements of customer risk in relation to products, services, and behaviors, emphasizing the categorization and quantification of these risks in the context of AML compliance. It discusses the need for a dynamic customer risk scoring model that evolves based on transaction activities and customer profiles. Additionally, the importance of integrating various risk factors and employing technology, such as machine learning, in AML systems is highlighted.
Elements of Customer Risk - Products & Services, Activity Patterns and Behaviors
- 1. https://www.caseware.com/alessa/ Elements of Customer Risk: Products & Services, Activity Patterns and Behaviors Laurie Kelly, CAMS Webinar Series Part 2 of 3
- 2. https://www.caseware.com/alessa/ 2 Alessa: Integrated AML Compliance Solution Customer Due Diligence Transaction Monitoring/ Screening Regulatory Reporting Sanctions Screening AML Capabilities Data Management, Workflows, Case Management, Fraud Detection & Prevention (Advanced Analytics) Traditional FIs FinTechs Gaming and Casinos MSBs Markets Questions? Email us at alessa@caseware.com
- 3. https://www.caseware.com/alessa/ Agenda 3 1. What is risk; categorizing risk elements 2. Quantifying and measuring risks 3. What are products/services risk and activity/behavior risks 4. Products & services risk in detail 5. Incorporating products & services risk into customer risk score 6. Activities and behaviors risks 7. The evolving customer risk score 8. Concluding Comments and Q&A
- 4. https://www.caseware.com/alessa/ 4 What is Risk? The intentional interaction with uncertainty Uncertainty is a potential, unpredictable, and uncontrollable outcome Risk is an aspect of action, taken despite uncertainty A subjective judgment made about the severity and probability of a risk Risk Perception: Risk:
- 5. https://www.caseware.com/alessa/ FinCEN CDD Rule: Customer Risk Profile Challenge for compliance professionals: Not so much WHY, but HOW? Certain elements of customer risk scoring only you can determine: • How you build your institution’s scoring model – which risk factors you choose, and if/how you assign weights to different factors • How you incorporate customer risk scores into your transaction monitoring software 5 Why a Customer Risk Score/Rating? “A financial institution should establish an understanding of the money laundering and terrorist financing risks of its customers.” Department of the Treasury, Financial Crimes Enforcement Network (2016)
- 6. https://www.caseware.com/alessa/ 6 Categorizing Risk Elements Profile & Relationships Products/ Services, Activities & Behaviors Geographic Risks Where Who What
- 7. https://www.caseware.com/alessa/ • Customer risk scoring model: Keep it simple • Need to quantify risk objectively, but be able to modify for judgement • Most models are way too complex • Will never be perfect 7 Quantifying and Measuring Risk Important: Risk scores should be dynamic
- 8. https://www.caseware.com/alessa/ • Customer characteristics: “Who?” • Products/Services/Activities/Behaviors: “What?” or “How?” • All risk categories are intertwined – every customer risk profile is a unique combination • Consider what’s relevant to your institution 8 Products, Services, Activities and Behaviors Risks
- 9. https://www.caseware.com/alessa/ 9 Product: Type of account or instrument Service: Transaction/activity; stand-alone financial service Products & Services Defined • Checking account • Savings account • Certificate of Deposit • Mortgage • Line of Credit • Personal loan • Brokerage account • Credit card • Debit card • Prepaid access card • Correspondent account • Commercial Letter of Credit • Wire transfer (receive or send) • Deposit – check or cash at teller window • Cash withdrawal: teller window, ATM • Mobile check deposit (phone app, ATM) • Mobile cash deposit – ATM • Stock trade • Cashier’s check • Check writing • Foreign check clearing • ACH • Trade Finance • Currency exchange • Private banking
- 10. https://www.caseware.com/alessa/ 10 Activities: The use of services Behaviors: How a customer performs an activity Activities and Behaviors Defined Examples for a checking account: • Writing checks • Making deposits at the teller window • Incoming ACH debits Example: Structuring Makes deposits at or under $10,000 to avoid CTR requirement Patterns: • Anticipated • Established over time • Out-of- pattern
- 11. https://www.caseware.com/alessa/ 11 Risks are Inter-related Internat’l ACH rec’d Frequent cash deposits under $10K
- 13. https://www.caseware.com/alessa/ Almost any banking product could be used to launder money Those with greater propensity: • Offer a higher level of anonymity • Allow cash transactions (deposits and withdrawals) • Allow foreign transactions • Allow for high speed funds movement • Allow for a high volume of transactions • Facilitate a particular money laundering method Consider all characteristics of a product when assessing risk 13 Product Risks
- 14. https://www.caseware.com/alessa/ 14 Product Risks cont’d Product Personal Checking ? 1 year certificate of deposit ? Brokerage account ? Commercial letter of credit Residential mortgage Anonymity Cash Txns Foreign Txns High Speed High Txn Vol Specific ML risk
- 15. https://www.caseware.com/alessa/ 15 Product Risks cont’d Service Remote/mobile check deposit Wire transfer Check writing Cashier’s check paid by cash Private banking Anonymity Cash Txns Foreign Txns High Speed High Txn Vol Specific ML risk
- 16. https://www.caseware.com/alessa/ #1 List every product and service offered #2 Use an objective ranking method to assign a level of money laundering risk to each (low, medium, high) #3 Assign a point value in your customer risk scoring model for the medium- and high-risk products/services #4 Each medium- or high-risk product or service the customer obtains/uses adds to their money laundering risk score 16 Incorporating Products & Services into Risk Score
- 18. https://www.caseware.com/alessa/ Fundamental purpose of an AML Program: Detect and report suspicious activity Once suspicious activity is detected: • Assess and continue monitoring • File Suspicious Activity Report • Terminate customer relationship? • Modify customer risk score 18 Customer Activity/Behavior in Risk Score Risk Score Element: Risk Score Point Value: Out of pattern activity – no SAR filed 15 SAR filed 25 Continuing Activity SAR filed 50 One method:
- 19. https://www.caseware.com/alessa/ Foundation of suspicious activity: Out of pattern Structuring: Most common money laundering method • Designing cash transactions to avoid reporting • Money mules working for launderers • Automated transaction monitoring should detect potential structuring 19 Transaction Activity and Behaviors Risks
- 20. https://www.caseware.com/alessa/ Funnel account: • Multiple FinCEN Advisories • Exploits the branch banking system • Trade based money laundering; human smuggling • Deposits from all over the country – withdrawn in another location 20 Transaction Activity and Behaviors Risks cont’d Red flags: • Multiple deposits quickly transferred to other accounts – same day or in 1-2 days • Multiple deposits from multiple locations • High dollar deposit activity - low account balance • Deposits from multiple individuals or companies • Deposits from multiple sources (cash, ATM deposits, checks, wire transfers)
- 21. https://www.caseware.com/alessa/ Business customer accounts • Sudden/unusual incoming or outgoing wire transfers • Incoming wire transfers followed by matching outgoing disbursements • Foreign wire transfers, especially with no prior history • Incoming round dollar wire transfers of $25,000 to $50,000 • Explanations that don’t make sense/no valid business purpose 21 Transaction Activity and Behaviors Risks cont’d
- 22. https://www.caseware.com/alessa/ The underlying data on which a customer risk score is based can change over time • New accounts added • New products or services added • Length of customer relationship grows • Relocation, change of occupation • Changes in transaction patterns and behaviors Customer risk score should evolve as these changes occur • Closer account monitoring when risk level increases • Prompts for additional inquiry and due diligence • Lower monitoring thresholds if anticipated risky behavior doesn’t occur • Use professional judgement on a case-by-case basis 22 Customer Risk Score – Always Evolving
- 23. https://www.caseware.com/alessa/ • Keep the customer risk scoring model as simple as possible • DOCUMENT the how/why of your model • Educate front line staff • Ensure customer information and resulting risk factors are regularly updated • Customer risk profiles: continuously evolving • Address change • New products/services added • New foreign payment sources/destinations • Changes in behavior • SAR filing 23 Concluding Comments
- 24. https://www.caseware.com/alessa/ • Use technology built into your AML systems – machine learning • No one risk factor exists in a vacuum • Risk profile has limited value unless consider customer behavior as well 24 Concluding Comments
- 25. https://www.caseware.com/alessa/ Elements of Customer Risk: Products & Services, Activity Patterns and Behaviors Laurie Kelly, CAMS Webinar Series Part 2 of 3