Defining Heightened Risk Entity

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CA Mayur Joshi
CA Mayur Joshi
CA Mayur Joshi is a Forensic Accounting evangelist in India. He is the co-founder of Indiaforensic and is author of 7 books on forensic accounting, fraud investigations and money laundering.

Risk Assessment procedures of the banks require them to identify and classify the customer. Classification of High Risk Customers is one of the major challenges that every financial institution face.

In simple terms, any person or entity connected with a financial transaction which can pose significant reputation risk to the financial institution is termed as High Risk Customer. There are primarily two types of High Risk Customers

High Risk Individuals

NonĀ­-resident (Foreign Citizens) customers, high net worth individuals, non face to face customers and politically exposed persons etc. are considered as Heightened Risk Individuals. Mostly the salaried employee or low income group individuals are treated as low risk customers. Banks obtain sufficient identification data to verify the identity of the customer, his address/location, and also his recent photograph

Heightened Risk Entity

On other hand, Heightened Risk Entities is a broader concept and include wide range of business entities. These type of customers may include any legal entity such as trusts, charities, NGOs and organizations receiving donations from foreign countries or the incorporated business whose beneficial ownership is not clear etc. Any entity with dubious reputation as per publicly available information is also treated as Heightened Risk Entity.

Financial Institutions are required to establish and maintain the procedures and processes to identify the customers posing higher risk. Customers that are likely to pose a higher than normal risk to the bank should be classified as high risk depending on parameters such as

  1. Customer’s background
  2. Nature and location of activity
  3. Country of origin,
  4. Sources of funds
  5. Profile of the beneficial owners etc

Financial Institutions apply enhanced due diligence measures based on the risk assessment methodologies thereby requiring extended due diligence for higher risk customers. There are different stages where the financial institutions may need to perform extended due diligence on heightened risk entities such as

  • At the time of account opening
  • At the time of conducting financial transactions
  • When the banks observe suspicious activity in the accounts

Banks are required to perform the extended due diligence on the heightened risk individuals and entities at each of the above stages. The methods and extent of information required for performing the due diligence varies with the type of account. There are situations where extended measures are required to identify the customer

  • In case of the newly opened accounts if the bank observes sudden spike in the cash deposits it may need to consider the risk of money laundering. Banks will also have to perform the extended due diligence in addition to collect the documents from the customers.
  • Politicians, their relatives and their close aides are often required to face the extended due diligence process.
  • Industries that have a higher risk of terrorist financing, such as gambling, often have extended due diligence requirements.

Financial institutions facing the challenges to deal with the heightened risk entities performing the criminal activities under the pretext of the legitimate business.


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