The recent unprecedented level of anti-financial crime related activity, and significant media attention focussed on the Russian regime, has understandably been on sanctions.
But there is a wider consideration for firms – the ripple effects of the changing political landscape, risk exposure to sanctioned individuals and entities, and firms changing risk appetite as a result of the events of recent weeks. How is this affecting individual firm’s portfolio-level view of its overall risk exposure, especially where customers may not be sanctioned, but recent events have elevated the financial crime risk?
The potential for increased risk exposure across customer populations, and the increased due diligence activity and associated cost that this will incur are important responses to what have been fast moving risk profile changes.
Understanding any nexus to Russia itself (and other countries connected with the conflict, such as Belarus, Hungary and Ukraine), has been a less well reported focus of some Financial Crime Compliance teams.
Firms ability to rapidly adapt their Customer Risk Assessment capabilities; including the risk lists that drive it, and view of customer exposure is more important than ever. In this insight piece, we pose some key questions that firms would need to consider to identify the increased levels of risk exposure, and to then manage that increased risk within the risk appetite of the firm;
Risk List updates
Is there a mechanism in place that allows the lists utilised in Customer Risk Assessment to be effectively updated (for example, Country Risk List, Industry / Occupation Risk Lists), and do these updates closely align to the firm’s financial crime risk appetite? If outdated risk lists are being used, the firms understanding of its customer risk exposure will be inaccurate.
Portfolio-level view of risk exposure
Is it possible to derive from existing customer data the firm’s customer exposure to Russia and other locations such as Belarus? Is it possible to understand, for example, how many Russian nationals have a relationship with the firm, even where they are domiciled in the UK or another location the firm operates in? This data can support dialogue with senior management to ensure alignment with the firms risk appetite.
Individuals and entities with links to sanctioned countries or parties automatically treated as High Risk
Does the existing Customer Risk Assessment consider customers that are linked to recently designated sanctioned countries, or sanctioned individuals or entities to be automatically treated as High Risk or equivalent?
Increased due diligence levels
Where adjustments are being introduced to the Customer Risk Assessment methodology to reflect the changing environment, is there a clear understanding as to which customers will be assessed as an increased risk? Are the implications of the due diligence levels expected (e.g. customers that now required Enhanced Due Diligence to be carried out) fully costed and resourced?
Consideration needs to be given to the number of customers affected, and the corresponding level of due diligence that will need to be carried out as either a ‘business as usual’ activity, or a mini remediation project.
Transactions
Does the Customer Risk Assessment consider transactional activity, in particular where funds are moving to or from high-risk countries? Failure to incorporate this data at a customer level will limit the accuracy and effectiveness of the Customer Risk Assessment methodology.
Apply changes rapidly
Does the firm’s approach to assessing the financial crime risk exposure of its customers allow for the prompt deployment of changes to the customer population, or is this a longer process with a number of activities that could leave the firm exposed in the meantime?
Bring back into risk appetite
Having understood the risk exposure, the firm’s governance needs to facilitate an understanding at a sufficiently senior level, and support any steps that may be required to manage the exposure back to within risk appetite.
Gracechurch has extensive experience in the design, implementation and operation of some of the industry’s most advanced Customer Risk Assessment programmes. If you wish to discuss any aspect of risk and how it may affect you or your business, please contact a member of the Gracechurch Financial Crime Prevention team.
Simon Prescott
23 May 2022