What are connected clients in an AML risk assessment?
Director and Founder of AMLCC and AMLCC Consult
Most transactions will involve other people and entities alongside your direct client. They might be the other party to a sale, a guarantor, an introducer, a beneficial owner sitting behind a company, or a family member connected to a politically exposed person (PEP).
These are your connected clients. FATF’s customer due diligence standards expect you to understand who they really are, beyond the name on a document.
Who counts as a connected client?
Connected clients turn up in different forms depending on the work you’re doing. What links them is that they have a stake in, or influence over, the transaction or relationship you’re assessing.
For example:
- In a property transaction, the other party to the sale is connected, along with anyone acting for them. FATF’s Real Estate Sector guidance states that professionals “should always comply with their due diligence obligations with respect to both the buyers and sellers of the property under transaction.”
- In company formation, every beneficial owner and anyone with control over the entity is connected, even if they never speak to you directly. FATF defines a beneficial owner as “the natural person who ultimately owns or controls a customer.”
An introducer who brought the client to you falls under FATF Recommendation 17, which allows firms to rely on third parties for parts of due diligence but keeps ultimate responsibility with you.
How can connected clients change your risk?
A client can look low risk on paper and still bring risk into the relationship through someone connected to them. This risk can look different, depending on your sector and your services.
These are some examples of how you might come across it in your business:
- A conveyancing instruction could bring a higher risk if the other party in the chain can’t explain their source of funds. FATF Recommendation 10 requires firms to identify and verify source of funds as a core client due diligence (CDD) measure. You still have this obligation even when the money is coming from someone other than your direct client.
- A seemingly low-risk corporate client asking for a company formation could have a PEP hidden behind a layered ownership structure. FATF Recommendation 12 requires enhanced due diligence wherever a PEP is identified, including establishing source of wealth and source of funds and getting senior management approval before proceeding.
- A client’s loan guarantor based in a high-risk jurisdiction adds exposure that your client wouldn’t bring on their own. FATF Recommendation 19 requires firms to apply a form of enhanced due diligence to business relationships and transactions involving anyone from a country on FATF’s Black List.
None of these red flags will show up if your risk assessment only looks at the named client and stops there.
How to identify and assess connected clients
Start by mapping out everyone with a role in the transaction or relationship. For a company client, that means working through the ownership and control structure until you reach the beneficial owners. For a transaction, it means identifying the other party and anyone acting for them.
Once you know who’s connected, apply due diligence that’s proportionate to the risk they add. Not every connected party needs the same depth of checks as your direct client. Some might need more, some less.
What matters is that you’ve made a documented decision about each one. If you’ve decided a connected party needs additional checks, your file should show why, based on the risk they present.
A supervisor reviewing your file will want to see that you identified who else was involved and made a reasoned decision about each of them. A risk assessment that looks at just your client and not the other parties in the transaction is incomplete.
AMLCC’s Client Linking feature is built for exactly this.
- Risk assess each connected party separately, using AMLCC’s client risk assessment tool
- Link those individual profiles together against the transaction they belong to, so you get one full picture instead of scattered files
- See every connection at a glance, whether it’s a corporate structure, a family group or a property chain
- Produce a risk report covering every party involved, ready to hand over if a supervisor or law enforcement ever asks you to prove the work
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