Western Banker - July/August 2016 - (Page 8)

Effectively Assessing Customer Risk: From Front-End Ratings to Ongoing Risk Analysis to Rating Migration By Angela Lucas hat goes into determining how much risk a customer poses to your bank? This is a question that has plagued banks for years. Let's take a little walk down memory lane...after the events of 9/11, the subsequent introduction and signing of the USA PATRIOT Act and the general thrust to build stronger, more effective fortifications around our banking controls, we had a special task as examiners: To assess the adequacy of our banks' Bank Secrecy Act programs. This task was all-encompassing. We needed to determine whether all four pillars were existent and functioning, whether appropriate risk assessments and controls were put into place for BSA and CIP functions and whether the banks were administering sound processes to ensure they were not doing business with anyone on the OFAC list. This was an interesting time to be an examiner. In this first goround, we were charged with giving the banks a "bite of the apple," meaning that we would surface weaknesses, deficiencies and other potential issues within the program so that a bank could implement meaningful and effective corrective action. It was not about lowering the boom. As you might imagine, assessing the adequacy of customer identification and due diligence practices was critical to this process. The same question was always asked: who are your high risk customers? The prompt response to 8 www.wib.org Western Banker this question was typically, "We're a small bank. We don't have any". At that point, we would talk with the staff about how to view the customer base differently, using the examples of higher risk occupations and businesses outlined in the FFIEC BSA/AML Examination Manual, as a starting point. At the very least, a bank could start to identify potentially higher risk customers by using that list. Fast-forward to 2016. Is this still an adequate practice? The short answer is "No". Don't misunderstand, determining whether your customer falls into one of those higher-risk categories is part of the process - but only part. When you assess the level of risk a customer poses to your bank, you need to consider the following, at a minimum: * Occupation or nature of business. * Country of residence and geographic location of the customer and/or business operations. * Source of funds: Funds to open the account initially and those flowing through the account on an ongoing basis should be documented. Remember that a check or cashier's check drawn on another institution is not necessarily devoid of risk; the source of funds backing the check http://www.wib.org

Table of Contents for the Digital Edition of Western Banker - July/August 2016

A Message from the President & CEO
From Front-End Ratings to Ongoing Risk Analysis to Rating Migration
The Fifth Pillar: Continuing Expansion of KYC
Turning Compliance Overhead Into a Competitive Advantage
Getting Started With Third-Party Risk Management: Two Key Questions
Four Steps to Winning the Vendor Management Battle
Douglass M. Eberhardt, WIB Community Banker of the Year
Regulatory Hot Topics
Professional Development
Welcome New Members
Product and Services Directory
Index of Advertisers

Western Banker - July/August 2016

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