How Dynamic Client Risk Profiling Leads to Stronger Anti-Money Laundering Compliance

business forensics

Transaction monitoring is a high-risk practice as it makes financial crimes such as money laundering hard to detect. That’s because it only concentrates on what’s happening at the transaction or account level. But, individual transactions hardly ever tell you the complete story, while client profiles provide a layered analysis of what’s happening.

When we talk about client profiles, we have more than KYC in mind. A client profile is a way to transcend monitoring on the transaction or account level. It includes behavioral patterns, network information, and historical data. These sources help to detect deviations to a client’s normal behavior, which is usually a sign that something suspicious is going on.

Client profiles help you to be more proactive in investigating compliance breaches. Let’s take a look at how that works.

What are client profiles and how do they improve compliance software?

Transaction monitoring is still and will always be the core of compliance software. It’s the first lead in a possible investigation. But, transaction monitoring alone gives you a one-dimensional view of what’s happening. If a transaction creates an alert, it requires the compliance officer to check for extra data. If, for example, a payment is made to someone with the name Grace Mugabe, the system creates an alert. The compliance officer then looks into the payment to find out the date of birth of the account holder.

This process is automated when the system matches transactions to client profiles. But the client profile doesn’t only hold static data such as a birth date. It also includes behavioral information. This could include anything from where does this person usually spend their money, to what amounts usually come into their accounts.

The next layer is to check for network patterns. So, it matches transactions against the relationships the account holder has with others. The client profile is also updated on a continuous basis and matched against sanctions and PEP-lists.

By enriching signals with all the information mentioned above, minor changes to a client’s situation are easily detected. It makes the generated alerts more accurate. It also helps to identify those transactions that don’t fall within the rules that would normally trigger a signal. And finally, it provides the context to prioritize alerts.

What does behavior tell us?

Every detective knows that a change in behavior is the first sign something could be going on. People are creatures of habit, after all. How do you find anomalies to ordinary behavior? When a client suddenly has activities that aren’t in line with his usual activities, he may have found a new interest. Or, something could be going on. Behavioral profiles show you what a client does and when he does those things. It asks:

  • What’s the appropriate financial behavior for a client?
  • Does this client’s behavior match his age?
  • Does it fit his occupation and income?
  • Is it proper for his residential address?
  • His general appearance?
  • And the type and level of previous financial activities?

But the system should also look at what’s going on in society as a whole. The corona crisis, for example, gives criminals a new opportunity to launder money. The Independent observes a spike in social media mule recruiting disguised as work from home jobs. The people targeted for this scam are given a few tasks to earn their trust before they’re asked to transfer money via their personal account.

What makes it hard to detect these money mules is that they don’t know they’re being tricked. They are using their account and have already been cleared in the KYC-process. Money mules are usually given small amounts to transfer because those will stay under the radar of transaction monitoring. But the client profile can reveal money muling by taking previous financial activities into account. So, the alerts are enriched with the following information:

  • Previous activity: 4 incoming payments per month
  • New activity: 10 incoming payments per month
  • 6 out of 10 incoming payments leave the account again in full
  • Client occupation: waiter
  • Salary received from a new employer

Looking at this case from a behavioral standpoint should immediately raise a red flag. The client previously worked in the hospitality business, that would be a sign he might have been furloughed due to the Covid-19 lockdown. It would increase the chance of the client falling for a money mule scam. This is the point where a compliance agent comes in to investigate the case further. In the meantime, the compliance software is already aware of the fake company that pays this client’s salary. It flags the company and looks at the ties it has with other clients. That network information could reveal more clients have been tricked into money muling.

What can a customer’s network reveal?

Criminals never act alone. In fact, they try to create as many layers as possible to cover up their illegal business. That’s why it’s crucial to have insight into the connections between people or companies.

Smurfing or structuring, for example, is hard to detect with transaction monitoring alone. Small cash deposits won’t raise a flag by itself. Neither do wire transfers. But, when multiple clients deposit cash on their accounts every week and then wire those funds to the same account in Hong Kong, that’s a red flag. This is especially so when those people seemingly don’t have any connection to Hong Kong making it necessary to transfer funds there.

Another example of a money-laundering tactic that’s hard to notice without network information is U-turning, where a person or company transfers money to another person or company, only for the same funds to return to the original payer.

How to implement client profiles in your compliance systems

When client profiles aren’t an option in your system, and that’s its single flaw, there’s no need to replace it entirely. BusinessForensics modules can easily be integrated into your current compliance software. Implementing modules that enrich the signals your current transaction monitoring system generates, doesn’t take much time or configuration. It does make a big difference in your ability to fight financial and economic crime. Our client profile module helps you to vastly reduce the number of false-positive alerts generated by the transaction monitoring system. Reducing false positives gives your compliance agents more time to work on true positives. This, in turn, lowers the chance financial crimes remain undetected. And it increases your control over your compliance.


Tames Rietdijk

Tames Rietdijk is the CEO of BusinessForensics. His area of expertise lies with Product management, Forensic investigations and Data analytics. His work is focused on improving market mechanisms and operational efficiencies to increase value for his customers.