KYC Risk Rating

Risk scores are categorized into high, medium, and low risk. These risk scores are applied to customers based on their KYC criteria, such as information about their location, source of wealth, business type, PEP status, and other details that account for the result in the overall risk score. Naturally, high-risk clients require more stringent verification and monitoring procedures. 

The KYC Risk rating process typically consists of three main steps: collecting, analyzing, and verifying data. 

In practice, this procedure has three key elements, which are:

• Collecting information. This is vital data, such as the customer’s personal details, address, or transaction history. 
• Performing a risk assessment. This is the part where the data and the user’s transaction history are analyzed to actually detect AML red flags and any other money laundering risks.
• Assigning a risk rating. In this stage, the customer is assigned a risk rating (ranging from low to high).

KYC Risk Rating is essential for companies to verify client identities and comply with KYC/AML regulations, which require implementing a risk-based approach. This enables them to identify high-risk customers and prioritize their resources when focusing on riskier customers and their transactions.

The Customer Due Diligence (CDD) Final Rule is an amendment to the Bank Secrecy Act (BSA), which is the main AML legislation in the US. One of its requirements is to assess the risk of money laundering and terrorism financing, obligating financial institutions to use risk ratings. 

This involves assigning risk scores to customers, enabling a more targeted assessment of high-risk individuals.

The CDD Final Rule also requires to:

• Identify and verify customer identities. 
• Identify and verify beneficial owners.
• Have a clear understanding of the purpose of business relationships and categorize customer risk profiles.
• Conduct ongoing monitoring to detect and report suspicious activity and update customer profiles regularly.