KYC Risk Assessment Guide: Evaluating Potential Client Risks With Automation

KYC, or Know Your Customer risk assessment, is a day-to-day compliance process for regulated entities that need to evaluate potential risks linked to their customers, and in this way, prevent fraud. The sources used for this type of assessment can vary depending on the company’s internal risk appetite, defined risk factors, operating markets, local and global regulations, etc. 

The main issue is that a manual risk management strategy is ineffective when the company has to handle large volumes of customers, as it requires analyzing and collecting extra documents and KYC data points for high-risk customers, for example, Source of Funds (SOF) for a better look into the customer’s financial background. What’s more is that risk profiles can change over time, and even seemingly low-risk customers can later show signs of suspicious activity. That’s why ongoing monitoring and real-time alerts are vital. 

How Does KYC Risk Assessment Work?

KYC risk assessment is both a compliance requirement and a fraud prevention tool used by regulated entities like banks and financial institutions. It works by evaluating the money laundering or other potential threat level each customer poses by assigning a risk score (low, medium, or high) based on their customer profile and behavior. 

For example, with iDenfy’s automated KYC risk assessment solution, you can:

1. Identify geographic risks by analyzing the customer’s country of residence and flagging those from restricted jurisdictions.
2. Customize and add extra risk indicators such as country of origin, age, and Politically Exposed Person (PEP) status.
3. Detect adverse media mentions or criminal links that could damage your company’s reputation.
4. Verify whether the individual or corporate entity is prohibited or involved in high-risk industries like gambling.

To stay compliant, all of your Anti-Money Laundering (AML) procedures, including KYC risk assessment, need to be tailored to each customer’s risk level. This helps identify and manage potential risks more efficiently, as well as apply the right level of due diligence based on each customer’s risk profile. 

What Challenges Do Businesses Face During KYC Risk Assessment?

A limited set of data points can lead to gaps in the client’s risk assessment, making it impossible to accurately define their risk level. Outdated or inaccurate information, such as old internal blocklists or outdated Politically Exposed Persons (PEP) lists, can cause businesses to miss red flags and fail to report suspicious activity in time, leading to compliance violations and potential fines.

If your current KYC process lacks sufficient risk indicators, the solution is simple: collect more relevant data to build a fuller, more accurate KYC risk profile. This helps determine whether a customer:

• Poses a money laundering risk or is involved in terrorist financing
• Is a PEP or appears on criminal watchlists or blacklists
• Is sanctioned or connected to a sanctioned entity

With automated KYC risk assessment software like iDenfy, you can easily integrate customizable risk scoring workflows. For example, you can define your own risk score values and categories, set user restrictions based on the geographical risk factor, limiting countries that are accepted for onboarding, and more use cases, which we lay out in our free guide. 

What You Get With the KYC Risk Assessment Guide

This guide provides detailed information on the KYC risk assessment process, detailing how our automated software simplifies this due diligence element, automating high-risk customer identification and verification tasks that can be a hassle for internal analysts. 

What’s inside:

• Common risk categories and scoring methods
• Key regulatory expectations and customer due diligence requirements
• Key steps to conduct a proper KYC risk assessment
• A proper checklist for creating your own risk framework using automation

The guide includes recommendations on how to categorize customer risk, assess various risk factors, such as geographic and transactional exposure, based on the specific requirements in various industries. It’s packed with real use cases, ready-to-use workflow options, and visual examples, all based on iDenfy’s proven experience in high-risk, regulated sectors.