5 Steps to Adopting a Risk-Based Approach to KYC

Mechanistic V’s Risk-Based Approach

Adopting a risk-based approach to customer screening means being responsive to risk throughout the screening process.

As the Financial Action Task Force puts it, a risk-based approach involves “analysing and seeking to understand” how any money laundering or terrorist financing risks you identify affect your business, and responding accordingly.

Example of a mechanistic (non risk-based) approach

Step 1 – Initial screening reveals that a potential customer is a PEP

Step 2 – You flag this information on the customer’s record and fill in the appropriate documentation

Step 3 – You move on to the next customer

Due diligence is no ‘box-ticking’ exercise

In a risk-based approach, the individuals or entities deemed highest risk are allocated the most resources—further investigation, more regular review and so on.

In a mechanistic approach, risks are identified but not investigated or acted upon appropriately.

A mechanistic approach to screening often emerges in organisations in which there is a general lack of knowledge concerning financial crime, or which are highly siloed such that screening is carried out without oversight by experienced compliance professionals.

It’s a common theme of financial crime scandals that the organisations involved have all the tools to identify criminal behaviour, but fail to stop it because compliance is seen as a box-ticking exercise and clear red flags are missed. All compliance staff should have at least a basic understanding of the crimes they are working to prevent.

Why Screening Matters

Customer Screening: A Critical First Step


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