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#2159528 - 01/07/18 10:53 PM Changing customers from high risk to medium -when?
JB Offline
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Joined: Dec 2010
Posts: 202
I'm curious what is acceptable when it comes to changing customers from high risk to medium risk. If a customer has been on your high risk list for a year, and there have been no unusual transactions, just typical transactions for their business type (e.g. liquor store having cash deposits), or you have a foreign based business on your high risk list, but all they have done in the past year on the account is receive less than $10k in ACH credits (for their business services from clients who pay them in the US), does that justify changing them to medium risk?

How do you determine which "higher risk" customers remain on the high risk list? If they're 'high risk' businesses, but you've had them on your high risk list for 1 or 2 years and continually review their account and it continues to be commensurate with their business type (e.g. cigar company sending wires to suppliers in the Dominican Republic, liquor store depositing cash, etc), is it ok to change them to medium risk at that point? I have a tough time with this because I had an auditor one year say that we needed to put all foreign based businesses on our high risk list and all businesses who regularly send international wires. I did that, but it sure is a waste of time to continue monitoring these accounts so heavily when they are still engaging in typical transactions for their business type.

Just curious how other banks approach this. Is it just common practice to keep all 'higher risk' businesses or customers rated higher risk simply because the FFIEC exam manual says they have high risk attributes? I would greatly appreciate some feedback. Thank you!

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#2159533 - 01/08/18 01:05 PM Re: Changing customers from high risk to medium -when? JB
thomasj Offline
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Joined: Mar 2001
Posts: 5,062
I believe that there has to be some room for stratification among your customers with high risk factors. There are some that are very obvious - like private ATM owners (those that can replenish are higher risk than those who can not), MSBs (agents of Money Gram are less risky than registered check cashers), NRAs (a Non-Resident alien from the UK could be considered less risky than an NRA from the Middle East), cash intensive businesses (those who you have banked for 25 years could be less risky than a new cash intensive business). You should be able to identify high, moderate, and low risk customers among each high risk group. This stratification can be used to schedule EDD reviews, obviously those that are more risky would be on a more aggressive schedule than those with a lower residual risk. To make this work though, you need to make sure that you document your reasoning for the stratification and that you have appropriate monitoring that will allow you to recognize changes in behavior among these customers that may change their residual risk.

I have gone down the road of reviewing all high risk customers X number of times a year and it can be a huge waste of resources reviewing low risk NRAs every quarter. Again, documentation is huge part of being able to defend these decisions to your auditor and examiner.
Knowledge is knowing what to say. Wisdom is knowing when to say it.

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#2159539 - 01/08/18 02:44 PM Re: Changing customers from high risk to medium -when? JB
kw004h Offline
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Joined: Nov 2009
Posts: 219
Chicagoland, IL
One thing to add to thomasj's input -- with which I agree -- is that many shops use the high risk customer list as the place to inventory all customers that fit the "high risk customer" types, but may not have created any other way to inventory them. This causes problems in producing a list of customers who are, for example, Private ATM Owners, but which have been deemed to be lower risk because of the factors thomasj outlined. Examiners and auditors will still expect you to be able to demonstrate you understand which of your customers fit these high risk customer types, even if they are not currently on your "high risk" list.

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