High-Risk Transactions: How to Identify, Manage & Mitigate Risks

Nowadays, transactions are becoming increasingly complex, and differentiating between high-risk and low-risk activities is essential for safeguarding institutions from fraud, money laundering, and other illicit activities.

High risk transactions pose significant threats to financial institutions, often involving larger amounts of money, cross-border transfers, or associations with suspicious entities.

This article aims to explore the nuances of high-risk transactions, identify the factors that contribute to their categorization, and provide clear examples to assist professionals in recognizing these activities within their own institutions.

Key Takeaways

• Geography, customer profile, and behavior determine transaction risk level.

• Cross-border, cash, and crypto transfers are commonly high-risk.

• Low-risk transactions follow expected patterns and customer profiles.

• Effective risk management requires real-time monitoring and due diligence.

• Enhanced due diligence is essential for high-risk customers.

• SAR filings are critical for reporting suspicious high-risk activity.

What is a High-Risk Transaction?

High-risk transactions are those that show signs of potential fraud, money laundering, or other financial crimes. They usually stand out because they don’t match a customer’s normal behavior or involve risky elements. Here’s what typically characterizes them:

1. Unusual activity: The transaction is very different from what the customer normally does, for example, sudden large transfers or frequent small ones meant to avoid detection.

2. Unclear source or purpose: It’s not clear where the money came from or why it’s being moved.
   

3. Fast, complex, or large: The transactions move quickly, go through multiple accounts, or don’t seem to have a clear reason.
   

4. Risky countries: The money is sent to or from places known for weak financial regulations, corruption, or sanctions.

5. High-risk individuals or businesses: Involves people like politically exposed persons (PEPs) or businesses in risky industries like gambling, crypto, or shell companies.

6. High-risk channels: Uses methods that make tracking harder, like mobile banking, wire transfers, or cryptocurrency.

Example: A sudden transfer of large amounts of money to a high-risk country, without an apparent business justification or prior history of similar transactions, may be flagged as a high-risk transaction.

Key Risk Indicators That Define a High-Risk Transaction

Understanding the specific factors that determine whether a transaction is high-risk is crucial for preventing financial crimes. Here are the primary factors:

1. Customer Risk Profile: High-risk customers, such as Politically Exposed Persons (PEPs) or individuals with connections to high-risk jurisdictions, are often involved in higher-risk transactions.

2. Transaction Behavior: Transactions that deviate significantly from a customer’s typical transaction history, whether in size, frequency, or destination, can be indicators of suspicious activity.

3. Payment Method: Certain payment methods, such as credit card payments, money transfers, or cryptocurrencies, may be more susceptible to misuse or fraud, increasing the risk of the transaction and hence considered high-risk payments.

4. Geographic Risk: Transactions involving high-risk countries, often those with weak AML regulations, conflict zones, or known financial crimes, are flagged as high-risk.

5. Industry-Specific Factors: Industries such as online gambling, arms trading, or casinos are more prone to high-risk transactions due to the nature of their operations.

Types of High-Risk Transactions

There are several specific types of transactions that are considered high-risk in the financial industry:

1. Cash Deposits and Withdrawals: Large cash transactions, especially in jurisdictions where cash is commonly used for illegal activities, are seen as high-risk.

2. Cross-Border Transactions: Transfers to or from countries that are considered high-risk, especially those under economic sanctions, known for corruption, or with poor AML controls.

3. Cryptocurrency Transactions: Transactions involving cryptocurrencies can be hard to trace and often involve individuals or organizations in unregulated markets.

4. Transactions Involving New or Unverified Accounts: Transactions from newly opened accounts with minimal background verification, especially if associated with significant transfers, are highly scrutinized.

5. Business High-Risk Payments with Unclear Purpose: Businesses making payments without clear business justification or those involved in trade-based money laundering are considered high-risk.

High-Risk Transactions Examples

The following examples illustrate common scenarios that typify high risk transactions, helping financial institutions recognize red flags and strengthen their detection and prevention efforts.

Example 1: Cross-Border Wire Transfer

A large, frequent wire transfer from a high-risk country with a history of money laundering activities, made by an individual with no clear business justification. The transfer is directed to a destination with insufficient KYC procedures.

Example 2: Cryptocurrency Purchase

A customer buys large quantities of cryptocurrency using an unverified credit card, and then immediately transfers the assets to an untraceable wallet. This is indicative of money laundering or financial crime activities.

Example 3: Shell Company Transactions

A series of transactions made by a shell company that appears to have no actual business operations. These companies may be used for layering illicit funds.

Low-Risk Transactions Examples

Conversely, low-risk transactions involve standard activities that align with a customer’s usual pattern of behavior and involve legitimate sources of funds. For example:

• A salary deposit into an account with regular withdrawals for household expenses.
  

• Regular utility payments or mortgage repayments from a stable account.

• A typical retail transaction using a credit card at a well-established merchant.
  

Why High-Risk Transactions Pose a Threat to Your Organization

High-risk transactions can have profound effects on financial institutions:

1. Reputational Damage: Association with financial crime or enforcement actions can severely damage trust with clients, partners, and investors, impacting brand value and customer retention.

2. Increased Cost of Compliance: High-risk exposure demands enhanced due diligence, upgraded monitoring systems, and expanded compliance teams, raising operational and regulatory costs.

3. Strategic Restrictions or Business Model Changes: Institutions may be forced to exit certain high-risk markets or product lines, reshape business strategies, or implement stricter client onboarding rules to remain compliant.

4. Legal Liability and Litigation: Institutions can face lawsuits from affected customers, shareholders, or third parties, particularly in cases involving fraud, customer harm, or breach of fiduciary duty.

5. Operational Disruption: Responding to enforcement actions, audits, or internal reviews often requires reallocating staff and resources, disrupting day-to-day operations and long-term projects.

6. Loss of Market Confidence: Public exposure to high-risk transaction failures may lead to declining stock prices, credit downgrades, or loss of investor confidence, especially for publicly traded firms.

7. Regulatory Fines and Sanctions: Failure to detect or properly report high-risk transactions can result in significant penalties from regulators such as FinCEN and or FCA. Multi-million-dollar fines have been levied for AML breaches tied to overlooked high-risk activity.

8. Exposure to Fraud and Internal Risk: High-risk transactions may also stem from insider collusion, weak controls, or IT vulnerabilities, increasing the risk of fraud and internal misconduct.

9. Customer and Partner De-Risking: Engaging in or failing to mitigate high-risk transactions can lead to correspondent banks, payment processors, or large customers severing ties, causing a loss of business relationships.

10. Increased Regulatory Scrutiny and Supervision: Institutions associated with high-risk activity may be placed under enhanced regulatory oversight, audits, or mandated remediation programs, often requiring costly compliance upgrades.

Effective Strategies for Managing High-Risk Transactions

Managing high-risk transactions effectively involves a proactive approach:

1. Risk-Based Approach (RBA): Institutions should develop and implement an RBA to assess the risks associated with each transaction, using transaction monitoring systems (TMS) and customer due diligence (CDD).

2. Transaction Monitoring: Using AI and machine learning-based systems like FOCAL Platform to automatically detect and flag suspicious transactions based on established patterns.

3. Enhanced Due Diligence (EDD): For high-risk clients, enhanced due diligence processes should be conducted, which involve more thorough background checks, investigation into the source of funds, and regular reviews.

4. Suspicious Activity Reporting (SAR): Financial institutions must file SARs to alert regulators to transactions that appear suspicious.

Combat High-Risk Transactions Effectively with FOCAL

FOCAL platform provides an integrated solution designed to protect your institution from the risks posed by high-risk transactions. With its advanced transaction monitoring, screening capabilities, and customer risk scoring, FOCAL helps financial institutions swiftly detect, evaluate, and mitigate potential threats.

Protect Your Business with FOCAL

1. Real-Time Transaction Monitoring: Continuously monitor transactions for potential risks across multiple channels.

2. Transaction Screening: Efficiently screens transactions against global watchlists to ensure compliance.

3. Customer Risk Scoring: Automatically assigns risk scores to identify high-risk customers early.

4. Seamless Integration: Easily integrates with existing systems to enhance risk management without disruption.

5. Advanced Reporting & Audit: Generate detailed reports for compliance and internal audits, ensuring transparency.

Conclusion

Effective management of high-risk transactions requires robust transaction monitoring systems, a clear risk-based approach, and a commitment to continuous vigilance. With comprehensive financial crime prevention platforms like FOCAL, institutions can proactively identify and mitigate risks before they escalate.

6 FAQs Related to High-Risk Transactions

Q1. Which of the Following Transactions Has the Most Risk?

High-risk transactions typically involve:

• Large cross-border transfers to or from high-risk countries.

• Transactions involving cryptocurrency, especially those with unverified wallets or exchanges in unregulated jurisdictions.

• Unusual cash deposits or withdrawals that deviate significantly from a customer’s typical behavior.

Q2. What Is a High-Risk Bank Account?

A high-risk bank account is one that exhibits characteristics suggesting it may be used for illicit activities, such as money laundering or fraud. Common features include:

1. Accounts linked to high-risk industries like online gambling.

2. PEPs (Politically Exposed Persons) or clients from high-risk countries

3. Accounts involved in unusual or large transactions, often without clear business justification

Q3. What Are High-Risk Credit Cards?

High-risk credit cards refer to a card issued to individuals or businesses engaged in activities or industries deemed high-risk. These include:

• Cards used for online gambling or high-volume ecommerce.

• Cards involved in frequent international transactions or high risk payments to high-risk jurisdictions.

• Cards used for fraudulent activities, such as chargeback fraud or identity theft.

Q4. What Are High-Risk Accounts in Banking?

High-risk accounts in banking are those linked to customers with a history of fraud, such as frequent chargebacks or suspicious transfers. They also include business accounts with unclear purposes or those used for money laundering, like shell companies.

Accounts tied to high-risk countries or politically exposed people (PEPs) are also considered high-risk. Additionally, accounts involved in large transactions without clear proof of where the money is coming from are flagged as high-risk. These accounts require careful monitoring and ongoing checks.

Q5. Can High-Risk Transactions Involve Credit Card Payments?

Yes, high-risk transactions can involve credit card payments, especially when the payment is made to or from high-risk regions or industries. They can also occur when credit card details are used fraudulently, such as in cases of identity theft or card-not-present fraud.

Q6. Why Is Mobile Banking Considered Riskier Than Online Banking?

Mobile banking is considered riskier than traditional online banking due to several factors: Weaker Security, Device Theft, Insecure Networks, and Fraudulent Apps.