KYC AML Guide: the Clock shows the average reeding time of the blog11 min Read


KYC AML Guide: the Clock shows the average reeding time of the blogSeptember 20, 2023

What is Dynamic Risk Assessment in KYC and AML?

According to Simon Henry, the Executive Director of the Rio Tinto Audit Committee is of a belief that while doing the corporate risk assessment for fraud risks, the story ends up looking at every company’s culture. Henry has highlighted the Shell case, where it was fined $120 million. Also, Henry mentioned that the Rio Tinto itself has cultural issues indicating the destruction of sacred sites in Australia in 2020. This article will delve into the pivotal role of dynamic risk assessment in Know Your Customer (KYC) processes, exploring its significance, implementation strategies, and critical impact on enhancing financial security and regulatory compliance.

Belal Mahmoud

KYC Product Consultant

What is Dynamic Risk Assessment?

Dynamic Risk Assessment is the decision-making process that can be as fast as a quick response. Or it can be as slow as long-term planning for the organization’s dynamic risks. Moreover, organizations today need risk assessment more than ever before. The economic uncertainty and the challenges they face in terms of sustainable growth are worse than ever.

In such a business world, the verification and identification of clients and businesses are needed. For enterprises that are vulnerable to high risk, the need for an automated KYC is necessary. Dynamic Risk Management is the key to sudden risk responses and prevention of threats. For example, in case of a fire break out or a robbery, how should everyone respond in a store? It makes the workplace safe for workers in an uncertain environment.

Three Levels of Operational Risks

Strategic Risk The potential for adverse outcomes resulting from decisions and actions related to an organization’s long-term objectives and competitive positioning.
Systematic Risk It is associated with factors affecting an entire market or industry that lead to widespread impacts on investments or operations, often beyond an organization’s control.
Dynamic Risk It is the risk arising from the constantly changing business environment, including market conditions, technology advancements, and regulatory developments, that can affect an organization’s ability to adapt and thrive.

Dynamic Risk Assessment and KYC

KYC (Know Your Customer) is a crucial process for financial institutions to comply with Anti-Money Laundering (AML) regulations. Dynamic risk assessment is an important component of KYC, as it helps financial institutions assess and manage the risk associated with their customers. So, it is crucially important for high-risk exposures. They continuously monitor customers’ activities and assess risk levels based on their behavior and transactions. This enables financial institutions to identify potential money laundering activities and take necessary actions to prevent them.

Furthermore, it helps financial institutions stay ahead of evolving money laundering techniques. KYC relies on customers’ initial information, but this approach may become obsolete as money laundering techniques change over time. Therefore, it keeps institutions up-to-date and in compliance with AML regulations.

Financial institutions can use these assessments to gather relevant information and evaluate the customer’s risk level, thereby ensuring they are not doing business with individuals or entities involved in illegal activities. Particularly, Dynamic Risk Assessment supplements the customer due diligence too.

Uses of Dynamic Risk Assessment in KYC

Read the following points that explain the main uses of the process in KYC:

  • Establish a customer’s identity and legitimacy
  • Detect and prevent fraud, money laundering, and other illegal activities
  • Evaluate the customer’s financial status and behavior
  • Organizations can use KYC information to perform dynamic risk assessments and update their customer risk rating. It allows them to respond to changes in their customer’s risk status in real-time.
  • This helps organizations make informed decisions about customers, transactions, and business relationships.
  • Risk Assessment is always done to mitigate potential risks, and data collection is necessary in this regard
  • This data can be used by regulators & authorities to verify and confirm the customer’s identities.

DRA surpasses the Traditional Risk assessment due to the following features:

Dynamic Risk Assessment Traditional Risk Assessment
Relative risk scoring of customers diversifies and enhances risk profiling at different risk levels Absolute risk scoring limits the inherent risk assessment missing out on different risk levels
Risk levels can be upgraded or downgraded accordingly Risk levels remain the same throughout the risk assessment procedure
It learns from previous risk patterns through machine learning It is incapable of learning from historic risk patterns due to fixed risk scores
Cost efficiency is high & proportionate to the risk Low-cost efficiency
DRA is a compliance-based approach TRA is also a compliance-based approach

Fresh Thinking

Basically, the strategy of every fintech firm might differ in the case of risk management. It is because every company is different from another with respect to culture, business, scope, and operations. One organization might be exposed to financial risks, while another might be concerned about the on-site risks. So the strategic approaches will change in every case. However, the main motive is to support KYC as a part of the organizational risk management strategy. Hence, the risk assessment should have the following points in this regard.

  • It should have the ability to record the customer’s data prior to the KYC.
  • This data should be updated and usable for the KYC and AML activities.
  • A risk assessment strategy is necessary against financial risks like Money Laundering.

Hence, the dynamic risk assessment should comply with the KYC and AML regulations for enhanced risk mitigation.

Concept of Deep Learning

Leveraging a deep learning-based & networked risk assessment model allows you to preset thresholds and flag an event when those thresholds are breached. Thresholds for review trigger set responses using AI-based predictive analytics for evaluating risks. If dynamic risk assessment isn’t a part of the risk management program, the risk of exposure for entities & customers increases. The potential for damage to a financial institution’s reputation will outweigh the costs of establishing a comprehensive risk management practice.

By introducing dynamic risk management with deep learning techniques into the existing Due Diligence program, a proactive approach to risk management and prompt responses for what lies ahead becomes easier.

For more information: Dynamic Risk Management and Monitoring | NTT Data

Dynamic Risk Assessment (DRA) and Anti-Money Laundering (AML)

Dynamic Risk Assessment is often carried out to detect money laundering activities & other financial crimes. It is used by financial institutions to proactively identify and mitigate these risks through a data-driven approach. Here is how the DRA is applied to prevent Money Laundering and Financial Crime.

Real-Time Monitoring It involves continuous monitoring of transactions and behaviors of customers it highlights suspicious activities and reports them timely.
Predictive Analytics DRA leverages Predictive Analytics and Machine Learning to detect emerging risks.
Risk Scoring It assigns the risk scores to customers, transactions, relationships & entities. The higher the risk score, the tighter the scrutiny & investigation will be.
Data Integration DRA integrates multiple data sources including transaction data, customer profiles, and publicly available information like different lists. It helps in identifying the complex money laundering schemes.

Anti-Money Laundering Solutions are aimed to detect & flag illegal activity. AML programs are risk-based and they deal with the ever-changing customer profiles on an ongoing basis.

Risk Classification in KYC/AML Solutions

An ideal KYC and AML solution, crafted on a risk-based approach, has the following essential features:

  • Compiles and arranges customer interactions from various data origins.
  • Scrutinizes this activity by cross-referencing it against the regulatory compliance framework, different scenarios, and risk indicators.
  • Promptly notifies the compliance team of any potential suspicious behavior with precision.
  • Offers a well-organized platform for probing and recording these notifications.
  • Produces the necessary regulatory reports and accompanying documentation as mandated.
  • Offers user-friendly UI/UX design powered by easy-to-follow instructions & tools for KYC.
  • Ensures secure data sharing on client’s servers & their own serves.

Offering the above-mentioned 5 features is not a one-time job. Being able to monitor all current customer transactions and predict future transactions is the objective of an effective dynamic risk management approach. In order to ensure compliance with the regulatory requirements, appropriate risk-based procedures ensure dynamic risk management with the following steps:

  1. Establish risk-based procedures for customer risk profiling.
  2. Obtain and analyze customer data for risk profiles.
  3. Continuously monitor and update beneficial owner information.
  4. Regularly maintain and update customer risk data.
  5. Align customer data with AML risk profile, and prioritize high-risk customers.
  6. Review and adjust customer risk profiles as needed.
  7. Set standards for risk analysis and issue resolution.

Final Thoughts

Risk assessments are a crucial component of KYC and AML compliance. They help financial institutions assess and manage the risk associated with their customers and ensure they are in compliance with AML regulations. As money laundering techniques evolve, dynamic risk assessment becomes critical for institutions to stay ahead of the criminals in identifying & detecting potential criminal activities.

Also Read: Risk Management in KYC | KYC AML Guide


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Belal Mahmoud
KYC AML Guide: the Linkedin share

Belal possess over 8 years experience in the KYC Identity Verification industry. He has consulted KYC solutions for over 20 new economy companies at DIFC and ADGM while ensuring a seamless technical integration and helped in jurisdictional compliance audits.