Build a strong foundation with risk assessment and KYC procedures

The integration of the Section 7 risk assessment and KYC procedures is crucial for your organisation's compliance and efficiency. In this article, we review important themes within the Section 7 risk assessment, such as the analysis of the business model, client relationships, and risk factors. You will receive practical advice and a roadmap to help ensure that you build a strong foundation for your anti-money laundering processes – enabling you to comply with legal requirements and avoid non-compliance.

The relationship between the Section 7 risk assessment and customer due diligence procedures can be viewed through the following statement: Know your customer, and know yourself as a business. Or, in fact, it should be reversed.

Before an organisation can establish knowledge of its customers, it must first "know" itself. This is where the Section 7 risk assessment becomes an essential component.

In the construction of an anti-money laundering programme, the Section 7 risk assessment can be compared to the foundation of a house. The size and complexity of the house determine how strong the foundation must be.

The themes of § 7 risk assessment:

• Analysis and description of the organisation's business model

• Analysis and description of the organisation's client relationships and case types

• Risk assessment of the actual circumstances based on the specified anti-money laundering risk factors [1]

The risk assessment must separately address the risk that the organisation may be misused for money laundering and the risk that the organisation may be misused for terrorist financing.

If the work involved in preparing an accurate Section 7 assessment is overlooked, there is a risk that the subsequent stages of the customer due diligence procedure will not get off to the right start.This may later result in non-compliance with the rules when handling an AML-regulated matter or client, or during a supervisory inspection.

This is because the outcome of the Section 7 risk assessment determines how many resources your organisation should allocate to the establishment of its anti-money laundering processes. For example, it will have a significant impact if the organisation serves clients in countries outside the EU or in countries that do not have effective measures in place to combat money laundering and terrorist financing.

The risk factors split into 4 headlines, that you can pose as questions: 

• Which countries and geographical areas fall within the scope of the organisation's business activities?

• Which client types and client relationships does the organisation target with its services?

• Which case types make up the organisation's business activities?

• How does the organisation deliver its services to clients?

Once the Section 7 risk assessment has been completed, the next step is to ensure that the customer due diligence procedure under Chapter 3 of the Anti-Money Laundering Act is proportionate to the organisation's risk profile.

A practical example would be ensuring that clients from countries with a higher risk profile (as identified in the Section 7 risk assessment) are in fact treated as higher-risk clients than, for example, Danish clients, where ownership structures are transparent.

Roadmap for an organisation's § 7 risko assessment

Below is a suggested roadmap for organisations that need to update their Section 7 risk assessment:

1. Initial Analysis Phase and Data Extraction

Based on the business model and the questions outlined above, the organisation is described in detail.

2. Risk Mapping

Mapping of risk factors against the factual information derived from the analysis.

3. Documentation

Compiling the findings into a document that constitutes the organisation's Section 7 risk assessment.

4. The Result

The Section 7 risk assessment indicates how many resources should be allocated to the customer due diligence procedure and ensures that the procedure is aligned with the organisation's inherent risk.

[1] Annexes 2 and 3 of the Danish Anti-Money Laundering Act, FATF Guidance for a Risk-Based Approach: Legal Professionals (June 2019), the National Risk Assessment of Terrorist Financing 2024, the National Risk Assessment of Money Laundering 2023, among others.

Note: The article is an excerpt from our e-book "Rejsen Gennem Hvidvaskloven", written in collaboration between Kristine Sorken and Creditro. The e-book provides a practical overview of the requirements of the AML legislation, together with actionable guidance for your compliance work. You can download the full e-book here (Danish only).