How to Identify and Address True Customer Risk

Adam McLaughlin, Global Head of Financial Crime Strategy & Marketing, AML
How to Identify and Address True Customer Risk

It is nearly impossible for financial services organizations (FSOs) to fully understand all the risks they are exposed to. Finance being the bedrock of the global economy means FSOs have to cover a vast surface area and assess the sea of information the global economy produces. When you zoom in on a specific transaction or entity, finding the relevant data needed to make an informed decision is often difficult.

While there are real and significant challenges to ensuring bad actors don’t slip through the cracks, traditional financial crime risk management approaches don’t give FSOs the best chance of success. They struggle to:

  • Understand the true counterparties and beneficiaries of transactions
  • Provide continuous risk assessment (often taking a static, periodic approach)
  • Proactively monitor and move beyond event-driven risk management
  • Consider the broader context of activities and behavior for all entities involved
  • Cut through the noise and deliver relevant, accurate information for financial crime monitoring

These challenges are set against the backdrop of growing financial crime concerns:

“As far as how much money is laundered every year… the latest polls are showing us it’s about $6 trillion, and that’s back in 2019… Looking at SAR numbers, the UK saw an increase of 31 percent from 2020 to 2021… Fines are on the rise. From 2019 to 2020, we saw an uptick of 50 percent.”
Ted Sausen, AML Subject Matter Expert, NICE Actimize

Given the scale of the problem, the industry needs to adapt and find new, more effective approaches to customer risk management. All these challenges and more can be addressed with the ultimate solution – a contextual risk management approach.

What is Contextual Risk Management?

FSOs require a holistic approach to financial crime management that covers all data points across different business lines and functions to understand each customer and their evolving risk profile fully.

Contextual risk management is just this. The end state of a contextual risk management approach is a centralized hub of continuously updated information that shows the context of activity for entities and builds an accurate picture of the risk each entity presents.

Obtaining a contextual understanding of each entity’s risk means connecting all detection systems and data to find a single customer truth that is always accurate and up to date for each and every customer. This single customer truth, including a single accurate risk profile and trusted score, has cross-functional applications for AML, fraud, and customer decisions around lending and credit.

Creating this single customer truth can be accomplished using a range of advanced tools – from identity resolution that irradicates duplicate records and finds the real links and connections between different entities to machine learning and network analytics that explore networks, discover risks and continually monitor for changes. These technologies can help you better understand entities and their risks, generating superior risk profiles and scores. This helps drive optimization in monitoring systems for more effective monitoring and detection of suspicious activity to deliver more precise outcomes.

Think of contextual risk management as the heart of your financial crime operations. It is the muscle that drives everything, pumping information out and fueling all the other systems at work. These systems work best when they can rely on a shared source of accurate information. When they act alone, they remove context, lose the compounding benefits of working together, and open themselves to significant risk.

Why FSOs Need To Consider Contextual Risk Management

We all know significant challenges exist within financial crime management, including:

  • False Positives – High noise rates make it harder to spot the actual suspicious activity that requires greater focus. A significant contributing factor is a lack of context for entity risk.
  • Emerging Threats – Financial criminals are constantly adapting and finding new attack vectors. FSOs can quickly and proactively react to the latest threats with up-to-date and effective entity risk profiles.
  • Regulatory Pressure – Regulators are always looking for FSOs to improve efficiency; they often push for a risk-based approach that can be strengthened with accurate risk understanding.
  • Siloed Risk Scoring – Financial crime is complex, and FSOs need various systems to combat it. Without a holistic approach, data can become siloed, reducing overall effectiveness.

The Outcomes of Contextual Risk Management

Contextual risk management offers a range of beneficial outcomes across every process in financial crime management. From efficient KYC reviews to speedy onboarding, locked-down fraud prevention, comprehensive transaction monitoring, and precise risk screening, a clear understanding of customer risk improves decision-making throughout an organization while also mitigating risk in line with that organization’s specific business and compliance risk appetite.

Contextual risk management doesn’t just help catch the bad actors; it also creates an improved, friction-free experience for the overwhelming majority of legitimate customers that make up an FSO’s portfolio. With a single, accurate, centralized hub of entity information to use across the entire organization, teams can break down data silos, removing the chance of data inconsistencies influencing outcomes. Customer frustrations from repeated questionnaires and having to provide the same information to both AML and fraud teams are a thing of the past.

Outcomes of contextual risk management include:

  • Increased accuracy and greater confidence in risk coverage
  • Real-time notifications if activity or behavior materially changes an entity’s risk rating. With real-time monitoring and alerting, you can swiftly act to prevent criminals and terrorists from taking root inside your organization.
  • A centralized holistic risk management strategy where all risk factors are consolidated from across the entire organization to create a single risk profile for each customer based on all information available.
  • A greater understanding of trusted customers, while creating the best experience possible for them. This means faster onboarding, less fraud, reduced risk and happier customers.
  • Reduced manual work searching for the correct data to assess customer risk and investigate suspicious activities, leading to improved operational efficiency and greater focus on the real high-risk customers.

Moving Forward

The world of financial crime is changing, and FSOs need to enhance their understanding of their customers and their risk. Doing so will optimize risk coverage and improve risk management, operational performance, and confidence from both clients and regulators. The solution is to shift from siloed, static traditional approaches to always monitoring contextual risk management.

With a holistic view and value-adding context to hone risk profiling and scoring, FSOs get analysis that makes a real difference in decision making.

Contextual risk management is levels ahead of traditional financial crime management that only relies on manual, lengthy customer information gathering, periodic KYC and generic transaction monitoring.

In the past, FSOs would ask the customer a few questions and assign a risk rating. Periodic KYC may only reassess this rating at fixed times, leaving significant gaps and preventing a continuous understanding of risk. In contrast, a contextual risk management approach that considers context constantly feeds dynamic data from a wide range of sources to generate superior risk profiles that adapt immediately based on changes in customer activity or behavior.

FSOs can take steps today to implement a contextual risk management approach for customer risk management. Click here to learn more and start understanding the real risk each customer presents.

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