Introduction
Every business aims to get customers — but that doesn't mean all customers are desirable. In fact, Some are so problematic that you’re better off without them.
Even customers with a promising start can become thorns in your side in the long run. And just one of these high-risk customers can put you out of business.
Many businesses have lost funds, revenue and reputation because they weren't careful with the kinds of clients they took on. In 2022 alone, 70 percent of financial institutions lost over $500,000 to fraud, many of which were caused by high-risk clients.
Not all of these clients are entirely dangerous and can still be managed, but you need to take precautions to recognize, protext and prevent risk to know which ones to manage and which to discard.
How do you now effectively handle these customers and protect your business from legal, financial and reputational risks? The answers are here. Read on if you’d like to learn:
- Who high-risk customers are.
- Types of high-risk customers.
- How to recognize high-risk clients.
- Strategies to manage high-risk clients.
Who are high-risk customers?
High-risk customers are persons or entities that constitute a great risk to your business.
These clients have characteristics that increase the probability of exposing your business to many risks.
Some of these traits can be subtle, while others are quite obvious. It's your duty to know these features and identify them when you see them.
Types of high-risk customers
Familiarize yourself with the different types of high-risk customers so you can identify and manage them.
Here are some high risk customers you should be on the lookout for.
Clients with strange & irregular transaction history
When a client’s financial transaction pattern changes drastically and significantly, it should be a cause for alarm. T
hat’s why studying the pattern of your clients’ transactions is vital. You’ll be quick to notice a deviation from the norm and take proper precautions.
Clients with a controversial history
A client with a history of financial fraud, legal disputes and regulatory violations should be flagged as high risk. It might be a pattern or lifestyle.
If they did it before, chances are they’ll do it again. You must do your research and pay keen attention to such clients.
Money Service Businesses (MSBs)
These are basically non-bank financial enterprises that convert, exchange and transmit money.
They’re considered high-risk clients due to the nature of their business; they handle cash-intensive transactions. These transactions are prone to money laundering activities and terrorist financing.
Politically Exposed Persons (PEPs)
People who occupy prominent political offices or have close affiliations with high political office holders are high risk customers.
The reason is simple. They’re more susceptible to corrupt activities, bribery, money laundering and other illegal deals.
High risk businesses
High risk businesses like firearms, gambling and adult entertainment are red flags.
These businesses raise suspicions due to their susceptibility to illegal activities. You should exercise restraint and ensure special scrutiny when dealing with them.
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How to identify high-risk customers
Knowing the types of high risk customers is not enough; a bigger issue is how to identify these clients. No one will put a sign on their forehead saying,
“I’m high-risk, avoid me.” It's your job to identify these sets of clients. Taking a learner-centered approach will help here. Here are some ways to identify high risk clients.
Know Your Customers (KYC) policy
To identify high risk customers, you need to know your clients, hence the need for a strong KYC policy. It’s when you get to know them that you’ll be able to identify the ones that pose a risk to your business.
Gathering detailed information about their:
- Identity.
- Business concerns.
- Affiliations.
- Financial status.
- Etc.,
... will give you a clearer understanding of who you’re doing business with.
Risk profiling framework
Have a customer risk profiling framework. This is to help you analyze your customers to determine which ones are high risk. With this framework, you group customers according to their risk levels.
Use factors like location, transaction patterns, nature of business, reputation, etc. Rate your customers with these factors and you’ll identify the high risk ones.
Be on alert for negative media
Look out for any negative media coverage on any of your clients, especially those that have to do with misappropriation of funds, financial fraud, bribery or other forms of corruption. Staying abreast of news like this can save your business by the whiskers as you’ll be able to take early action.
Scrutinize sanction lists
Government agencies and other authorized bodies issue sanction lists.
These lists contain names of political office holders, their affiliates and other prominent individuals with corruption issues. People on these lists are considered as high risk customers. Having such lists helps you protect your business from potential financial risks.
Conduct Enhanced Due Diligence (EDD)
Due Diligence (DD) is standard in business. However, some clients need extra scrutiny, which is why you need Enhanced Due Diligence (EDD). These clients have shown, by their profiles and financial patterns or reputation, to be risky. But to confirm your suspicions and determine how risky they are, you need to conduct further investigations.
5 strategies to manage high-risk customers
After knowing the types of high risk customers and how to identify them, the next step is knowing how to manage them. This is a tough call, but it becomes easy with the right strategies. Here are some strategies you can employ in managing high risk clients.
Use fraud detection tools
The frequent occurrence of financial fraud has made it necessary to use fraud detection tools. These tools help you monitor, investigate and block shady activities on your website. If a high-risk customer is performing any transaction on your website, these software will monitor and flag it, making it easy for you to take necessary actions and avert disaster. Let alone the fact that AI-driven fraud is on the rise, imposing huge risks on businesses. You can easily mitigate it with the help of fraud detection tools as follows:
- Sumsub
- Ekata
- HAWK:AI
- Cybersource
- Resistant AI
Thanks to their advanced fraud detection models, they can help you perform digital identity verification against AI-based fraud or recognize other suspicious activities from high-risk customers.
Fraud detection software will give detailed information on people carrying out transactions on your website. This data includes details like location and type of device, among other critical info. Equipped with this information, you’re able to flag high risk clients before any damage is done.
Have a solid contract management practice
Having a solid contract management practice is another surefire way to protect your business from high risk customers.
In cases where you’ve signed a business deal with a high risk client, a solid contract can serve as a form of protection for your business. This measure is very important as it can be a lifesaver in dire situations.
Establish clear guidelines on risk-based decisions
Preparation is the best form of protection when it comes to high risk clients. When you envisage and prepare for a situation, you’re more likely to manage it more effectively than if you have not envisaged and prepared.
Determining in advance your thresholds for accepting, rejecting or ending business deals with high risk customers positions you to better protect your business. Your business is less likely to take a major hit if you have these guidelines in place.
Do frequent reviews & updates
It’s not enough to take precautions like KYC policies, risk profiling frameworks and sanction lists scrutiny. You must do regular reviews and updates. For example, a client’s details, like business concerns and financial status, might have changed. You need to have updated info on these data to efficiently manage high risk clients.
Also, sanction lists are frequently updated. It’s your duty to be abreast of such developments so that you can place the new inputs under scrutiny.
Your risk profiling framework and Enhanced Due Diligence (EDD) must also be regularly updated in line with new information.
Provide regular awareness & training for staff
The job of protecting your business from fraudulent activities and deals is continuous. As you’re taking steps to fortify your business (i.e. via cybersecurity software like TitanHQ), criminals are also perfecting ways to defraud your business.
That’s why you and your staff must stay abreast of new trends and patterns in financial fraud. Effective employee training methods and will go a long way in providing regular awareness and training for your staff.
Products like Scribe come in handy here to help you break down the processes into step-by-step guides.
Recognize and manage high-risk customers with time-tested strategies
To borrow a leaf from George Orwell’s book, all customers pose a certain level of risk, but some customers pose higher risks than others.
While every business transaction is a risk, some are riskier than others. That’s why the management of high risk customers is a skill every business manager, especially those in eCommerce, should possess.
Knowing the types of high risk customers is essential as it prepares you for what to look out for. Likewise, knowing how to identify these clients equips you to manage them. This is where strategies come in.
With the right strategies, you’ll be able to effectively handle each high risk client.
Some of the strategies you need include using fraud detection tools, having a clear-cut contract management practice, establishing clear guidelines on risk-based decisions, doing frequent reviews and updates and providing regular awareness and training for staff.
When you put all these into practice, you’ll be protecting your business from preventable financial complications.
About the Author
Moyofade Ipadeola is a Content Strategist, UX Writer and Editor. Witty, she loves personal development and helping people grow. Mo, as she’s fondly called, is fascinated by all things tech. She can be reached on Linkedin.
