In Anti-Money Laundering (AML) compliance, onboarding is far more than a welcoming process - it’s the foundation upon which a compliant and secure relationship with each customer is built. During onboarding, a company gathers essential information that informs its approach to managing potential risks associated with each new client.
Here are 5 elements that need to be included in the onboarding process of an entity:
1. Gathering Information to Build an Economic Profile
An essential step in onboarding is creating a detailed economic profile for each customer. This profile includes key information such as the customer’s business structure, beneficial ownership, sources of funds, and intended use of products or services. By collecting this data, the company gains a clear understanding of the customer’s financial behavior, which is instrumental in identifying any deviations from expected patterns later on.
Why this is necessary: A strong economic profile helps compliance officers differentiate between normal customer activity and transactions that may be indicators of money laundering or other illicit activities.
2. Enabling Comprehensive Risk Assessment
A well-structured onboarding process provides the foundation for a comprehensive risk assessment. With the information gathered, the compliance department can analyze specific risk factors such as:
Customer type: Evaluating whether the customer is an individual, a corporation, or a politically exposed person (PEP).
Geographic risks: Determining the customer’s country of residence, nationality, business and other links, with particular attention to regions associated with higher financial crime risks.
Product/service risks: Identifying the types of products or services the customer is interested in, as certain products may be more susceptible to misuse.
Delivery Channel: Identify whether the client is face-to-face or non-face to face as the latter has higher financial crime risks.
Why this is necessary: By assessing these risk factors early, the compliance team can determine whether enhanced due diligence is required for high-risk customers or if standard procedures will suffice.
3. Determining the Beneficial Owner:
The onboarding process must be designed in a way that makes it possible to effectively identify and verify the beneficial owners of a customer. This is crucial for understanding the true ownership and control of the customer entity and assessing potential risks associated with the ultimate beneficiaries.
Why this is necessary: Identifying beneficial owners helps to understand the ultimate source of funds and control of the customer, enabling a more accurate risk assessment and allowing for effective monitoring of the customer's activities.
4. Facilitating Customer Due Diligence (CDD)
Onboarding is when most initial Customer Due Diligence (CDD) activities take place. The data obtained allows the organization to establish the normal range of activities for each customer, from transaction amounts to types of services used.
Why this is necessary: This baseline, created at the outset, is critical for recognizing unusual transactions in the future. Any deviation from the typical activity identified during onboarding can alert compliance officers to potential money laundering or fraud. The onboarding process, therefore, directly enables the ongoing vigilance necessary to detect and report suspicious activity effectively.
5. Enabling Future Transaction Monitoring
The information collected during onboarding also plays a foundational role in transaction monitoring. By establishing a customer’s economic profile and expected behavior patterns, a company can develop automated or manual monitoring mechanisms to detect anomalies.
For instance, if a client’s average transaction amount and frequency are well-documented at onboarding, any future transactions that diverge significantly from these patterns can trigger alerts for closer examination.
Why this is necessary: Transaction monitoring is key to an AML program’s effectiveness, enabling companies to identify and investigate potential suspicious activity in real-time, if possible.
The benefits of an effective AML onboarding
Customer onboarding process offers broader benefits for AML compliance by setting a strong foundation for the entire client lifecycle. Companies with robust onboarding processes are better equipped to navigate regulatory changes, perform client reviews, and maintain compliant records—ultimately safeguarding themselves and their customers against financial crime.
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