High-Risk Business Industries: Sanctions & Compliance Risks

As technology continues to transform business operations, industries once deemed "low-risk" can quickly become high-risk. The rise of digital assets and decentralized finance (DeFi) has also introduced new risks that were not considered in traditional high-risk sectors.

Today, a high-risk business is not just defined by its size, industry, or location, but by how it adapts to a rapidly changing global market where regulations often struggle to keep pace with innovation.

What Are High-Risk Businesses?

A high-risk business is any company that operates in a way that increases the likelihood of financial losses, regulatory violations, or reputational damage. These businesses often deal with large sums of money, have complex or opaque ownership structures, or operate in industries that are highly regulated or prone to fraud and money laundering.

Understanding what qualifies as a high-risk business is crucial for financial institutions because these businesses present specific challenges that require careful attention and management.

What is a High-Risk Industry?

A high-risk industry is a sector where businesses face a higher likelihood of engaging in or being exploited for illicit activities like money laundering or fraud. These industries tend to have complex regulatory environments, involve large cash transactions, or operate internationally, all of which increase the risk of abuse or illegal activities.

For financial institutions, categorizing an industry as high-risk leads to heightened scrutiny, more stringent compliance requirements, and the need for careful risk management.

Although the terms high-risk business and high-risk industry are often used interchangeably, they refer to slightly different concepts.

List of High-Risk Business Industries

High-risk business industries are sectors that present a higher likelihood of being used, intentionally or unintentionally, for money laundering and or fraud. For banks and financial institutions, clients operating in these industries often require enhanced due diligence, continuous monitoring, and a stronger compliance framework.

Below is a list of industries commonly recognized by global regulators and financial institutions as high-risk:

1. Cryptocurrency and Digital Asset Providers

The crypto sector, including exchanges, wallet providers, and DeFi platforms, is high-risk due to its decentralized nature, pseudonymity, and inconsistent regulatory oversight across jurisdictions. These factors complicate transaction tracing and create opportunities for illicit finance.

2. Money Services Businesses (MSBs)

MSBs like currency exchanges, remittance services, and check cashers are exposed to risks due to high transaction volumes and international transfers. These entities can be exploited for layering and moving illicit funds quickly across borders.

3. Shell Companies and Trusts

Entities that lack transparent ownership can be used to obscure the source or destination of funds. These structures are often involved in tax evasion, corruption, or sanctions evasion schemes.

4. Real Estate

Real estate transactions involve large sums of money and are commonly used to integrate illicit funds into the legitimate economy. Properties purchased with cash, through offshore companies, or at inflated prices raise red flags for money laundering.

5. High-Value Asset Dealers (Art, Jewelry, Luxury Goods)

Businesses that deal in portable, high-value goods often face minimal AML regulations. These assets can be quickly transferred or sold and are attractive for laundering illicit funds.

6. Import/Export and Trade-Based Businesses

Trade-based money laundering is a known typology involving manipulation of invoices or documentation. Global supply chains and varying levels of regulatory enforcement heighten the risks in these industries.

7. Pharmaceuticals and Healthcare

Companies in this sector may be exposed to fraud, counterfeit products, or bribery risks, especially in international transactions. The high value and complexity of pharmaceutical supply chains increase vulnerability.

8. Energy and Natural Resources

Industries involved in oil, gas, and mining often operate in jurisdictions with weak governance. These sectors are vulnerable to corruption, sanctions evasion, and contract fraud.

How Does a Business Become High-Risk?

A business becomes high-risk when its characteristics increase the likelihood that it could be used for money laundering, terrorist financing, fraud, or other financial crimes. This doesn’t mean the business is illegal, it means it presents greater exposure to financial crime and requires closer scrutiny from banks and financial institutions.

1. Nature of the Business

Some industries are more vulnerable to misuse due to the way they operate. Sectors like gambling, cryptocurrency, and high-value asset trading (e.g., art, jewelry) are often flagged because they:

• Deal in large volumes of cash or easily transferable assets
  

• Involve anonymous or complex transactions

• Have limited regulatory oversight in certain jurisdictions
  

2. Geographic Exposure

Businesses that operate in or transact with high-risk jurisdictions, such as countries with weak anti-money laundering (AML) laws, high corruption, or international sanctions, are considered higher risk. Regulators like the Financial Action Task Force (FATF) regularly update lists of these jurisdictions.

3. Financial Complexity

High-risk companies often have:

• Complex financial structures
  

• International operations

• Unusual or high-volume transactions These features can make it difficult for banks to understand the source, flow, or ultimate beneficiary of funds.

4. Ownership and Transparency

Opaque ownership structures (e.g., shell companies, layered trusts) make it hard to identify the Ultimate Beneficial Owner (UBO). This lack of transparency increases the potential for misuse and is a major red flag for financial institutions.

5. Regulatory History

A business with a history of non-compliance, sanctions violations, tax evasion, or regulatory investigations may be classified as high-risk. Even associations with politically exposed persons (PEPs) can raise the risk profile.

6. Client and Partner Risk

If a business regularly serves or partners with high-risk clients , such as unregulated third parties, online gambling platforms, or sanctioned entities, it inherits some of that risk by association.

The Consequences of Being Classified as a High-Risk Business

When a business is categorized as high-risk, it faces several challenges that can significantly affect its operations, relationships with financial institutions, and growth potential. This classification comes with a range of consequences that can strain resources, increase compliance costs, and create barriers to financial services.

1. Increased Regulatory Scrutiny

High-risk companies are subject to Enhanced Due Diligence (EDD), which means that financial institutions must conduct more thorough background checks and continuous monitoring. This involves:

• Detailed reviews of the business's ownership structure, operations, and transaction history

• Regular risk assessments and audits to ensure compliance with anti-money laundering (AML) and anti-terrorist financing regulations.

Regulatory bodies such as FATF and FinCEN set strict guidelines that financial institutions must follow when managing high-risk clients.

2. Higher Compliance Costs

Being flagged as high-risk often results in higher compliance costs for businesses. These costs may include:

• Fees for specialized compliance officers or teams
  

• Investments in advanced compliance software for transaction monitoring
  

• Third-party audits to ensure adherence to regulations

Additionally, financial institutions themselves also incur higher costs to manage high-risk clients, and these costs may be passed on to the business in the form of higher transaction fees or more expensive services.

3. Difficulty Accessing Financial Services

One of the most immediate impacts of being classified as high-risk is the difficulty in accessing financial services. Financial institutions might restrict services, such as:

• Account openings

• International money transfers

• Lines of credit
  

4. Reputational Risks

Being labeled high-risk can also lead to significant reputational damage. The perception of being involved in illicit activities can:

• Deter customers or business partners from engaging with the business
  

• Reduce investor confidence and make it harder to attract capital
  

• Limit access to certain markets, especially international ones, where regulatory standards are strict

5. Restricted Growth Potential

The high-risk classification can limit a business's ability to expand or scale operations. Regulatory barriers, difficulty in obtaining financing, and restrictions on transactions make it harder for the business to grow, especially in global markets. For example, industries like cryptocurrency and real estate often face these constraints due to the perceived risks associated with large cash flows, offshore dealings, or lack of regulatory oversight.

High-Risk Products and Services

Certain products and services offered by businesses increase their overall risk profile. High-risk products examples include prepaid debit cards, wire transfers, foreign exchange transactions, and cryptocurrency, all of which are frequently used in money laundering schemes.

High-risk products examples include:

• Cryptocurrency wallets and exchanges.
  

• Prepaid debit cards and money transfer services.

• Real estate investments in high-risk countries.

• Precious metals and gemstones, due to their high value and portability.

High-Risk Businesses in KYC (Know Your Customer)

High-risk businesses require extra attention in the KYC process because they are more likely to be involved in financial crimes like money laundering or fraud. These businesses often operate in risky industries or regions and have complex operations that make them harder to monitor.

For high-risk businesses, financial institutions conduct Enhanced Due Diligence and a risk-based approach to manage these risks effectively. This involves:

• Verifying Ownership: Ensuring businesses disclose all owners, especially when their structures are complex.

• Monitoring Transactions: Keeping an eye on unusual or large transactions that might indicate illegal activity.

• Regular Reviews: Continuously reassessing the business’s risk level and adjusting monitoring efforts accordingly.

• A risk-based approach means that financial institutions assess each client’s risk level and adjust their compliance efforts based on that risk. High-risk businesses require more in-depth monitoring to ensure compliance.

Optimizing Risk Management for High-Risk Business Relationships

Effectively managing high-risk businesses is essential for financial institutions to prevent financial crimes. Here are the key strategies and best practices:

1. Risk Rating System: Use a clear risk rating system to classify businesses based on their risk levels. This helps apply the right due diligence measures based on factors like industry type, location, and transaction volume.

2. Leverage Technology: Implement automated monitoring systems powered by AI and machine learning like FOCAL platform to detect unusual activity quickly. These tools analyze large amounts of data, making it easier to spot potential risks.

3. Enhanced Due Diligence (EDD): For high-risk businesses, conduct Enhanced Due Diligence to verify the source of funds, understand transactions, and confirm the legitimacy of the business.

4. Continuous Monitoring: Regularly review transactions and update risk assessments to catch new risks. Ongoing monitoring is essential for keeping track of high-risk clients.

5. Compliance Culture: Encourage a strong compliance culture by training employees regularly on regulations and risk management. Promote open communication about risks within the organization.

6. Stay Updated with Global Standards: Ensure your institution aligns with international AML standards and adapts to any changes in regulations.

7. Regular Policy Reviews: Continuously review and update your KYC and AML procedures to stay ahead of emerging risks and comply with new regulations.

Conclusion

In conclusion, while high-risk businesses are often viewed through the lens of regulatory compliance and fraud prevention, a deeper, less discussed risk lies in stifling innovation. Many high-risk industries, such as cryptocurrency and fintech, drive significant technological advancements and economic change. The challenge for financial institutions and AML professionals isn't just about minimizing fraud but also ensuring that efforts to manage risk don't hinder the growth of these emerging sectors.

The future of high-risk businesses involves balancing robust compliance with fostering innovation, ensuring that the financial world can adapt and thrive without missing out on new opportunities.

FAQs on High-Risk Businesses

Q1. What is a high-risk business?

A high-risk business is one that is more likely to be involved in illegal activities like money laundering or fraud. These businesses often have complex financial transactions, operate in risky areas, or have unclear ownership.

Q2. What are examples of high-risk businesses?

Examples of high-risk businesses include: Cryptocurrency platforms, Money transfer services, Real estate, Luxury goods dealers, and Pharmaceuticals. These industries are often targeted for financial crimes due to their large transactions or less strict regulations.

Q3. How can high-risk businesses reduce their risk profile?

High-risk businesses can reduce risk by:

• Strengthening KYC and AML processes.
  

• Using automated systems to detect suspicious activities.

• Conducting Enhanced Due Diligence for risky clients.
  

• Regularly reviewing compliance procedures.
  

• Training staff to spot financial crimes.
  

• Staying updated with regulations.

Q4. Is consulting a high-risk business?

Consulting is not usually high-risk unless it involves large transactions or serves clients in high-risk sectors like finance or healthcare. If so, enhanced due diligence is recommended.

Q5. What are high-risk business industries for credit?

Industries considered high-risk for credit include: Construction, Mining and natural resources, Energy, Retail, and Hospitality, because these industries may have unstable finances, high debt, and a history of fraud, making them riskier for lenders.