In Know Your Customer (KYC) and Anti-Money Laundering (AML) programs, we often talk about customer risk levels: low, medium and high being the typical ones used. It sounds straightforward, right? But when it comes to actually labeling someone as “high risk,” things get a little more complicated. What exactly makes a customer high risk? And more importantly, how do you spot any red flags before they become real issues?

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What Qualifies a Customer as High Risk?

A high-risk customer is one whose profile, behavior or background presents an elevated exposure to financial crime, regulatory breaches / penalties or reputational harm. Identifying such customers is a key step in applying Enhanced Due Diligence (EDD) measures. While risk assessments do vary by organization, industry and jurisdiction, high-risk customers often fall into one or more of the following categories:

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1. Identity Risk

Customers who pose identity-related risk typically include:

• Politically Exposed Persons (PEPs): Individuals who hold or have held prominent public roles domestically or internationally, along with their close associates and family members.
• Non-resident individuals or entities: Particularly those from jurisdictions with limited information-sharing agreements or weak AML controls.
• Opaque ownership structures: Companies with layered, undisclosed beneficial owners or those making it difficult to identify the Ultimate Beneficial Owner (UBO).

These identity-related red flags signal a need for deeper verification and transparency into who is ultimately behind a customer or business entity.

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2. Business Activity Risk

Some types of businesses are more vulnerable to misuse due to their structure, cash flows or level of regulation. These include:

• Cash-intensive sectors: Such as car dealerships, convenience stores, real estate or hospitality - where the source of funds can be harder to trace.
• Cryptocurrency platforms or businesses: Due to the pseudonymous nature of blockchain transactions and heightened global regulatory scrutiny.
• Gambling, online betting or gaming platforms: Especially in jurisdictions with loose AML enforcement.
• Third-party intermediaries or shell companies: Where the end user or controlling entity is obscured.

These industries often require ongoing scrutiny and more frequent refresh cycles due to their high exposure to money laundering typologies.

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3. Geographic Risk

Customers located in, operating from or associated with high-risk regions or countries may present additional concerns, including:

• Jurisdictions under international sanctions or embargoes
• Countries on the Financial Action Task Force (FATF) grey list or black list
• Regions with a high Financial Crime Index or known deficiencies in AML/CTF frameworks

When a customer has ties to such locations, enhanced screening and documentation are essential to understand and mitigate geopolitical and legal risk.

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4. Behavioral Risk

High-risk behavior can emerge from patterns observed during onboarding or ongoing monitoring, such as:

• Unusual, suspicious transaction activity: Frequent large transfers, unexplained international payments or transactions inconsistent with the customer’s known profile.
• Lack of transparency: Evasive responses to Due Diligence (DD) questions or reluctance to provide documentation.
• Inconsistencies in documentation: Conflicting information between forms, ID documents or business records.

These red flags often emerge after onboarding, making Ongoing Due Diligence (ODD), continuous monitoring and refreshes critical to catching emerging risks.

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Conclusion: Identifying High-Risk Customers Is Just the First Step

Knowing what makes a customer high risk is essential, but recognizing the risk is only the beginning.

Once a customer is classified as high risk, your responsibilities expand. It’s no longer just about collecting standard documentation or ticking a box; it’s about digging deeper, validating information and continuously monitoring for changes.

This is where Enhanced Due Diligence (EDD) comes into play.

In our next article, we’ll break down how to apply EDD effectively: what to collect, how often to review and how to use technology to manage high-risk profiles without overloading your compliance team, so you can turn high-risk awareness into high-impact compliance action.

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