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How a KYC risk rating can help your ompany

KYC/KYB Knowledge & Training

If you are involved in the financial or business sectors, it is important to know both what a KYC risk rating is and how you can calculate yours. KYC, or “know your customer”, is an important process that allows financial institutions and businesses to verify the identity of their customers.

Doing so is vital, as it ensures that an institution is not doing business with an individual involved in either money laundering or another form of financial crime, such as terrorist financing.

What is KYC risk rating?

A KYC risk rating is simply a calculation of risk: either that posed by a specific customer or that which an institution faces based on its entire client portfolio. Most institutions calculate both of these risk ratings as each of them is equally important.

How KYC risk rating works

Under strict anti-money laundering regulations put in place by national governments, the FATF, and the UN, all financial institutions and many types of companies are required to closely monitor their clients’ accounts and report any suspicious activity.

These legal requirements often take the form of KYC policies, which are essential in preventing and reducing financial crime.

Institutions gather as much data as they can about their customers, and they then compile this into a portfolio.

Once the portfolio is completed, they closely analyse the information that they have obtained, and they determine the KYC risk rating of that specific client. If the risk rating is high, that client will be consistently and closely monitored. If the risk rating is low, the client will still be monitored, but not as diligently.

KYC risk rating: Automation vs. manual

Millions of transactions occur every day throughout the world, meaning that institutions constantly receive vast amounts of data that need to be analyzed.

KYC risk ratings allow for institutions to quickly and efficiently sift through this information.

Many of the rating tools are technology-based and at least partly automated, as manually organizing large quantities of data is ineffective and takes far too long.

Reasonable reassurance

Reasonable assurance in KYC risk rating is acknowledging that, no matter the quality of information used or effort spent on research, it is impossible to be certain that any customer is entirely free from risk.

Realising that 100% certainty is not attainable forces compliance professionals to take realistic, risk-based approaches to KYC and the prevention of financial crime.

This allows compliance officers and legislators to craft anti-money laundering policies that are both as effective and as unburdensome as possible.

KYC reasonable assurance also determines how much information should be collected about a customer. This relates to determining the risk rating of clients, and how closely they should be monitored, as part of KYC Enhanced Due Diligence.

These institutions must dedicate more effort than normal towards monitoring accounts and searching for financial crimes, and the standards for what classes as reasonable assurance will be higher.

Making predictions with KYC risk ratings

A KYC risk rating is also essential for another important reason: it allows institutions to make a prediction of what they believe a client’s account should look like in the future.

This is useful for determining whether something is unusual, out of place or suspicious.

If a client’s transactions begin to diverge significantly from the institution’s predictions, the institution will be notified and they will be able to further analyze the transactions for suspicious behavior. If you wish to keep your company free from involvement with corruption and money laundering, it is vital that you consistently calculate the KYC risk rating of all your customers.

This is the surest way to determine which clients present a higher risk to your company, thus allowing you to avoid liability and ensure that these clients are monitored appropriately.

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Originally published 27 June 2014, updated 26 March 2024

Disclaimer: This is for general information only. The information presented does not constitute legal advice. ComplyAdvantage accepts no responsibility for any information contained herein and disclaims and excludes any liability in respect of the contents or for action taken based on this information.

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