Customer and Transaction Risk Scoring in AML Compliance

AML risk scoring is a method used by banks and financial institutions to assess the risk level of customers and transactions to prevent money laundering, fraud, and terrorist financing.

Each customer or transaction is given a risk score based on factors such as:

• Who they are (e.g., nationality, job, or business type).
• Where they operate (e.g., dealing with high-risk countries).
• How they transact (e.g., large cash deposits, frequent international transfers).
• If they have links to high-risk individuals or adverse media.

Customers are then classified as low, medium, or high risk, helping banks decide how much monitoring or investigation is needed.

Example:

XYZ Bank is onboarding a new business client, WestOcean Trading Ltd. During the AML risk scoring process, the system assigns the company a high-risk score, triggering a deeper review.

Step-by-Step Breakdown:

1. Customer Risk Assessment

• The company is registered in the British Virgin Islands (a known tax haven).
• The owner’s identity is unclear, making it hard to verify who controls the business.
• The company claims to import luxury goods, but its financial records don’t match its transactions.

2. Transaction Monitoring

• Large wire transfers from unrelated companies are received frequently.
• Funds are quickly transferred to offshore accounts in Panama and the Cayman Islands.
• Transactions are structured to avoid triggering alerts, a common red flag.

3. Enhanced Due Diligence (EDD)

A deeper investigation finds:

• The company’s director was previously linked to fraud cases.
• News reports suggest the company is involved in trade-based money laundering.
• It fails to provide valid invoices for its transactions.

4. Action Taken

• XYZ Bank closes the account due to high risk.
• A Suspicious Activity Report (SAR) is filed with regulators.
• Authorities later confirm that WestOcean Trading Ltd. was part of a global money laundering network.

Key Takeaways from AML Risk Scoring:

• Helps banks detect and investigate high-risk customers.
• A high-risk score leads to more checks and possible account closure.
• Risk scores change based on customer behavior and new information.
• Proper risk scoring helps prevent money laundering and financial crime.