
High Risk Customers: How to Identify & Mitigate Risky Clients
Identifying and managing high-risk customers is crucial to maintain a profitable and secure business environment. High-risk customers can pose various challenges, from financial instability to compliance issues, all of which can significantly impact your company’s finances, operations, and reputation.
Being careful with high-risk customers is especially important in a B2B setting, where transactions are often larger and more complex. The repercussions of dealing with high-risk B2B clients can be even more severe, as they can become a financial burden, drain resources, and introduce legal challenges.
This article will provide an overview of the seven types of high-risk customers, along with strategies to effectively identify and mitigate the risks they pose. Here are the types of high-risk customers we’ll cover:
- Politically Exposed Persons (PEPs)
- Stolen Credit Card Customers
- Money Laundering Customers
- Multi-Accounting Customers
- Customers from High-Risk Countries
- Customers with Complex Ownership Structures
- Customers with Dubious Reputations
Who are high-risk customers?
High-risk customers are individuals or businesses that present a greater potential for causing financial, legal, operational, or reputational harm to your company, often due to their poor security, financial instability, industry, regulatory status, or business practices.
For example, a high-risk customer could be an individual or business at a higher risk of an account takeover (ATO) attack due to poor security practices. If they then have an account on your website, and you don’t have good account takeover prevention software, this could expose you to a data breach with serious financial, legal, and reputational repercussions.
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7 Types of High-Risk Customers
1. Politically Exposed Persons (PEPs)
Politically Exposed Persons (PEPs) are individuals who hold or have held a prominent public position, potentially enabling them to exploit their power and influence for illicit financial gains or money laundering. This category includes senior government officials, political party leaders, judicial figures, high-ranking military officers, and senior executives of state-owned corporations. Family members and close associates of these individuals also often fall under the PEP category.
The risk associated with PEPs lies in their potential involvement in corruption, bribery, and money laundering activities. Due to their status and influence, PEPs may have easier access to funds and opportunities to engage in unlawful financial activities.
For businesses, engaging with PEPs can lead to significant legal and reputational risks, not least the danger of inadvertently getting involved in money laundering schemes or corruption scandals, which can attract severe legal penalties and cause irreparable damage to your company’s reputation.
How to Identify Politically Exposed Persons
- Use of Specialized Databases: Use databases that are specifically designed to screen for PEPs. These databases usually contain extensive lists of individuals holding public positions globally and are regularly updated.
- Be Thorough with Your Due Diligence: Beyond standard due diligence, implement enhanced measures for individuals who are identified as potential PEPs. This includes verifying their public roles, assessing their level of influence, and understanding their source of wealth.
- Regularly Update Customer Information: Regularly review and update customer profiles to identify any changes in their status that may classify them as PEPs, such as taking up a new public position.
- Monitor Transaction Patterns: Keep an eye on transaction patterns that are unusual or inconsistent with each customer’s profile. Large transactions, frequent international transfers, or transactions involving tax havens should be scrutinized.
- Consult Public Information and Media: Consult public records and media reports to gather information about individuals’ political connections and public roles. This can include news articles, government websites, and public declarations.
2. Stolen Credit Card Customers
Stolen credit card customers are individuals who use stolen or fraudulent credit card information to conduct transactions. These customers are characterized by certain behaviors and patterns that can signal fraudulent activity.
The risks associated with stolen credit card customers are many. Without proper fraud protection, there’s the immediate financial loss from the transaction itself. If the fraud is detected after the product or service has been delivered, the business suffers a direct financial hit. Additionally, there are chargeback fees and increased transaction costs.
Beyond financial losses, businesses face reputational damage and the risk of losing trust from legitimate customers. There’s also the added burden of enhanced scrutiny from credit card processors and financial institutions, which can lead to higher processing fees or even termination of service.
How to Identify Stolen Credit Card Customers
- Inconsistent Billing and Shipping Information: Watch for unusual differences between billing and shipping details. Fraudsters often use stolen card information with different shipping addresses.
- Rapid Succession of High-Value Transactions: Be cautious of multiple high-value transactions in a short period, especially if they are not typical for the customer’s purchasing history.
- First-Time Customers Making Large Purchases: New customers making unusually large purchases should be flagged for additional verification.
- Unusual Customer Communication Patterns: Look for oddities in communication, like a reluctance to provide contact details or inconsistencies in the information provided.
- Implement Advanced Fraud Detection Tools: Implement credit card fraud detection software that uses AI and machine learning to analyze and flag suspicious transactions.
3. Money Laundering Customers
Money laundering customers are individuals or entities engaged in financial transactions to disguise the origins of funds acquired through illegal activities. These customers often use seemingly legitimate business transactions to launder money. Identifying such customers involves understanding their characteristics and the risks they pose.
Characteristically, money laundering customers engage in transactions that don’t seem to fit their business profile or display an unusual pattern of financial activity. This can include overpayments, frequent large transactions, or transactions involving high-risk countries.
They may also show a reluctance to provide complete or accurate information about their business, the source of their funds, or the purpose of their transactions.
How to Identify Money Laundering Customers
- Lack of Transparency in Financial Dealings: Watch for customers who are reluctant or unable to provide clear information about their business activities, sources of funds, or the purpose of transactions.
- Inconsistency with Market Value: Transactions that do not align with the market value of goods or services, including overpayments or underpayments, can be indicative of money laundering.
- Use of Intermediaries: Be cautious of customers using intermediaries without a clear or logical reason, as this can be a method to obscure the origin of funds.
- Rapid Movement of Funds: Be wary of customers who move funds rapidly in and out of accounts, especially if these movements have no apparent business rationale.
- Compliance with AML Regulations: Make sure that you stick to Anti-Money Laundering (AML) regulations and guidelines, including Know Your Customer (KYC) protocols and reporting of suspicious activities to relevant authorities.
4. Multi-Accounting Customers
Multi-accounting customers are individuals or entities who create and use multiple accounts for deceptive or fraudulent purposes. This behavior is often observed in environments where incentives, discounts, or special conditions are offered to new or specific categories of clients. These customers exploit these incentives dishonestly and pose a significant risk to your company.
The characteristics of multi-accounting customers include the use of many different email addresses, phone numbers, and payment details to set up several accounts. They might also show patterns of similar transaction behaviors across different accounts or use VPNs and proxies to mask their IP addresses. Sometimes, these accounts are used simultaneously or in quick succession, which can be a red flag for fraudulent activity.
How to Identify Multi-Accounting Customers
- Cross-Reference Contact Information: Look for the repeated use of similar email addresses, phone numbers, or physical addresses across multiple accounts. Small variations in these details can be a red flag.
- Analyze IP Addresses and Device Fingerprints: Monitor for multiple accounts being accessed from the same IP address or device. The use of VPNs and proxies can also be a sign of multi-accounting.
- Pattern Recognition in Transactions: Use transaction monitoring software to identify patterns in transactions, such as similar purchase histories or timing across different accounts.
- Abnormal Usage of Promotions and Offers: Pay attention to accounts that exclusively engage in activities taking advantage of new customer offers, discounts, or promotions.
- Behavioral Analysis: Use behavioral analysis to detect inconsistencies in user behavior that are typical of e-commerce fraud.
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5. Customers from High-Risk Countries
Customers from high-risk countries are individuals or entities originating from regions with a higher propensity for money laundering, fraud, or other financial crimes. While it’s important not to stereotype individuals or businesses solely based on their country of origin, it is important to acknowledge the potential risks associated with customers from these regions.
Characteristics of customers from high-risk countries can include limited financial transparency, complex business structures, and a lack of stringent regulatory oversight. They may also have unusual transaction patterns, such as frequent large transactions or a tendency to engage in high-risk industries.
How to Identify Customers from High-Risk Countries
- Geographic Risk Assessment: Maintain an updated list of countries categorized as high-risk for money laundering or financial crimes, as provided by relevant authorities or international organizations.
- Use of Geolocation Data: Utilize geolocation data to verify the physical location of customers during transactions, which can help confirm or refute the country of origin.
- Screening for Sanctions Lists: Continuously screen customers against international sanctions lists, which can help identify individuals or entities associated with illegal activities.
- Regular Risk Assessments: Periodically review and update risk assessments for customers from high-risk countries, as risk profiles can change over time.
- Risk-Based Approach: Implement a risk-based approach, where the level of due diligence and monitoring is proportionate to the perceived risk associated with each customer.
6. Customers with Complex Ownership Structures
Customers with complex ownership structures are individuals or entities that use intricate ownership arrangements to conceal the true beneficiaries or owners of their accounts or assets. These customers often utilize complex webs of holding companies, trusts, or offshore entities, making it challenging to ascertain the actual individuals or entities benefiting from the financial transactions.
Characteristics of customers with complex ownership structures include a lack of transparency regarding their ultimate ownership, the use of multiple legal entities, and often, a preference for offshore jurisdictions with lenient disclosure requirements. They may also showcase behavior aimed at evading regulatory scrutiny, such as frequent changes in ownership or a reluctance to provide clear documentation.
How to Identify Customers with Complex Ownership Structures
- Beneficial Ownership Verification: Verify the true beneficial owners of legal entities associated with the customer, ensuring transparency and clarity regarding ownership.
- Scrutinize Offshore Entities: Pay special attention to customers with offshore entities or jurisdictions known for their lenient disclosure requirements, as these can be used to obscure ownership.
- Review Legal Documentation: Analyze legal documentation, including articles of incorporation, shareholder agreements, and organizational charts, to identify any irregularities or hidden beneficiaries.
- Continuous Monitoring: Continuously monitor customer accounts and ownership structures for any changes or updates that may indicate attempts to obscure ownership.
- Use of Specialized Tools: Utilize specialized tools and databases that provide information on corporate ownership and beneficial ownership, helping to uncover hidden structures.
7. Customers with Dubious Reputations
Customers with dubious reputations are individuals or entities whose backgrounds raise questions or concerns based on publicly available information. These customers may have been involved in past legal issues, ethical controversies, or activities that have negatively impacted their reputation.
Their characteristics often include a history of legal disputes, negative media coverage, or associations with questionable organizations or individuals.
How to Identify Customers with Dubious Reputations
- Background Checks: Conduct thorough background checks on customers, including searches for any criminal records, legal disputes, or adverse media coverage.
- Media Analysis: Monitor news articles, reports, and social media platforms for any negative or controversial mentions related to the customer or their business activities.
- Review of Associations: Scrutinize the customer’s affiliations with other individuals or organizations that may have questionable reputations or histories.
- Customer References: Request and contact references or previous business partners to gather insights into the customer’s past behavior and reputation.
- Industry-Specific Information: In some industries, there are specialized databases or forums where reputational information may be shared. Explore these resources when applicable.
Tools and Technologies for Customer Risk Identification
The right tools and technologies are crucial to mitigate any potential issues associated with high-risk customers. Here’s a list of risk management tools and their supporting functionalities:
1. Customer Due Diligence (CDD) Software
CDD software automates the process of collecting and verifying customer information, including identity verification, background checks, and risk assessment. It helps in identifying politically exposed persons (PEPs) and individuals with dubious reputations.
2. Anti-Money Laundering (AML) Solutions
AML solutions use advanced algorithms and data analytics to detect suspicious transactions and patterns indicative of money laundering or fraud. They can screen customers against sanctions lists and monitor transaction behaviors in real-time.
3. Know Your Customer (KYC) Platforms
KYC platforms streamline the customer onboarding process by verifying customer identities, checking against databases, and assessing risk profiles. They help in identifying customers from high-risk countries and those with complex ownership structures.
4. Enhanced Transaction Monitoring
Enhanced transaction monitoring tools provide real-time alerts for unusual or high-risk transactions, enabling businesses to investigate and take appropriate action promptly. These tools help identify stolen credit card customers and multi-accounting customers.
5. Beneficial Ownership Registries
Beneficial ownership registries offer insights into the ultimate owners of legal entities, helping to identify complex ownership structures and customers attempting to obscure ownership.
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DataDome provides comprehensive account takeover protection software that empowers businesses to safeguard themselves and their customers against high-risk customers. and transactions. It does so by removing a criminal’s primary means of attack, which are the software, scripts, and bots they use to target your websites, mobile apps, and APIs.
DataDome identifies these automated threats in real-time, no matter how advanced they are, and blocks them immediately. It does so in a compliant, hands-off way that maximizes your security. Additionally, DataDome takes only minutes to set up and provides an easy-to-use dashboard to understand what threats you’ve been protected from. If you want to see the software in action, book a live demo today.
*** This is a Security Bloggers Network syndicated blog from DataDome Blog – DataDome authored by DataDome. Read the original post at: https://datadome.co/bot-management-protection/high-risk-customer/