Risk refers to the potential for loss, harm or adverse consequences that may arise from engaging in a particular activity or relationship. Within the discipline of Know Your Customer (KYC), compliance and financial crime prevention, risk is the possibility that a customer, transaction or third party could expose an organization to money laundering, terrorist financing, fraud, corruption, sanctions violations or other forms of financial or reputational damage.

Risk is assessed based on a variety of factors, including the customer’s geographic location, industry, ownership structure, transaction behavior and historical associations. For example, a customer based in a high-risk jurisdiction, or one with complex corporate structures and limited transparency, would likely be considered higher risk than a straightforward, well-documented local business.

Understanding risk is essential for applying the appropriate level of due diligence. A low-risk customer may only require standard verification checks, whereas a high-risk customer would trigger enhanced due diligence measures and closer ongoing monitoring. Organizations are expected to apply a risk-based approach, which means tailoring their compliance efforts to match the level and type of risk they are exposed to.

Accurate risk assessment and effective risk management are fundamental to maintaining regulatory compliance, making sound business decisions and avoiding the legal, financial and reputational consequences of unknowingly facilitating illicit activity.