It is the foundation of the FATF standard (Recommendation 1). Firms assess risk by customer type, product, delivery channel and geography, apply simplified measures where risk is low and enhanced measures where it is high, and keep the assessment up to date.
Example
A bank applies enhanced checks to cash-intensive businesses and high-risk countries and lighter checks to salaried customers with simple accounts.
Where it appears in the exams
This topic is relevant for CAMS, CFCS.
Related terms
- Customer due diligence (CDD): Customer due diligence is the set of checks a firm does on a customer: identify and verify them, identify the beneficial owner, understand the purpose of the relationship, and monitor it over time.
- Enhanced due diligence (EDD): Enhanced due diligence is the additional scrutiny applied to higher-risk customers, relationships or transactions, beyond standard customer due diligence.
- Transaction monitoring: Transaction monitoring is the ongoing review of customer transactions to spot activity that is unusual or inconsistent with what is known about the customer, so that it can be investigated and, if needed, reported.
Source: FATF Recommendation 1. Independent explanation for study purposes, not legal advice.