What are the main ML/TF risk factors, and what makes a customer higher risk?

A firm measures ML/TF risk through four groups of factors: who the customer is, where the customer and its money are connected to, what the customer buys or does, and how the customer reaches the firm. The law lists customers, countries or geographical areas, products, services, transactions and delivery channels; the EBA guidelines treat products, services and transactions as one group and delivery channels as another.

These are the primary ML/TF risk factor categories; the law's list is not exhaustive, but it is built around them. Market, interest-rate or foreign-exchange risk are financial risks, not ML/TF risk factors. Countries, products and channels are covered in How do firms assess country risk? and How do products and delivery channels affect risk?

Customer risk looks at three things, for both the customer and the beneficial owner. Activity: does their background fit what the firm knows about their past, current or planned business, turnover, source of funds and source of wealth? Are they connected to industries that typically carry a higher corruption risk, for example public procurement, the extractive industries, arms and defence, construction, or pharmaceuticals and healthcare, or to casinos, precious-metals dealers and some money service businesses? Do they deal in cash, or have links to a politically exposed person (PEP)?

Reputation: are there credible adverse media reports, have assets of the customer or someone close to them been frozen in administrative or criminal proceedings or over terrorism allegations, and has the customer been the subject of a suspicious transaction report before? Nature and behaviour: is the identity in doubt, is the ownership structure transparent and commercially sensible, are there bearer shares or nominee shareholders, is the customer an asset-holding vehicle, does it ask for complex or unusually large transactions without an obvious purpose, does it demand unnecessary secrecy, and can its wealth and funds be plausibly explained?

Credible adverse media that raises even a slight suspicion is reported internally to the AML compliance officer; the customer is not alerted.

In wealth management, risk rises with wealth earned in higher-risk industries like gambling, arms, construction, mining and oil, or private military contracting, credible allegations of wrongdoing, demands for unusual confidentiality, behaviour that makes normal patterns hard to establish, and very wealthy, high-profile or non-resident customers and PEPs. A PEP always requires enhanced due diligence.

In investment firms and funds, the warning signs are behavioural: an investment with no obvious economic purpose, redeeming a long-term investment soon after buying it, especially at a loss or with high fees, repeated buying and selling without a strategy, paying in more than needed and asking for the surplus back, suspicious use of a cooling-off period, unexplained changes of settlement location, and multiple accounts without notice. The customer's nature matters too: companies or trusts in higher-risk or non-transparent jurisdictions, unregulated investment vehicles, opaque structures and unregulated nominee companies. The FATF's guidance for the securities sector adds links to known typologies, intermediaries that are unregulated or regulated in weak AML/CFT jurisdictions, bearer-share companies and unduly complex ownership.

Risk can also be lower. Institutional investors whose status an EEA government agency has verified, such as an approved pension scheme, EEA government bodies and financial institutions established in the EEA are examples.