The risk-based approach is central to the effective implementation of AML concepts. A risk-based approach means that organisations such as banks and financial institutions identify, assess, and understand the money laundering and terrorist financing risk to which they are exposed, and take the appropriate mitigation measures in accordance with the level of risk.
What do we actually mean by that? How does an AML compliance program run in an organization on a daily basis when you use the risk-based approach?
Risk-Based Approach Definition
The Financial Action Task Force (FATF) is an international organization established by the G7 nations to combat money laundering. As part of its 2012 recommendations to nations who were attempting to combat money laundering, FATF presented these national recommendations. These recommendations are based on the idea of risk-based approaches to anti-money laundering.
As part of a risk-based approach, financial institutions such as banks need to carefully assess potential AML risks. Knowing your customer is necessary for this. This means finding out about the businesses, industries, and characteristics of the prospective and actual clients. Knowing your customer better allows you to better assess how likely they would be to commit money laundering or engage in other illegal activities. The knowledge you gain will enable you to react to potential problems more quickly and more effectively.
What Is The Meaning Of The Risk-Based Approach?
The operational idea of the risk-based approach is straightforward. You identify the highest compliance risks to your organization; and make them the priority for controls, policies, and procedures. Once your organization’s AML compliance program reduces those highest risks to acceptable levels, you move on to the next lower risks.
One can see why a risk-based approach is so useful. An organization’s biggest compliance risks will cause the most disruption should they come to pass: time spent on investigations, money spent on regulatory settlements, unwanted headlines, business partnerships jeopardized, and so forth. If there’s one thing senior executives hate, it’s a disruption to their business. So operationally, a risk-based approach makes huge sense.
This flexibility allows for a more efficient use of resources, as organizations can decide on the most effective way to mitigate the money laundering and terrorist financing risks they have identified. It enables them to focus their resources and take enhanced measures in situations where the risks are higher, apply simplified measures where the risks are lower and exempt low risk activities. The implementation of the risk-based approach will avoid the consequences of inappropriate de-risking behaviour.
Regulators advocate a risk-based approach for another reason: It shows that organizations understand the money laundering and terrorist financing risk to which they are exposed. In contrary, if an organization’s local regulator gets the impression that perhaps a particular organization sees AML compliance as a checklist item to put behind it, it puts the organization in a much worse position. Regulators might start questioning the organization’s sincerity about AML compliance as well as the effectiveness of related measures.
Anti-money laundering should be taken with a risk-based approach. The necessity cannot be denied. Cutting off traffickers’ and terrorists’ funding is the best strategy in today’s always-connected, digital world. Risk-based approaches to anti-money laundering make this easier than ever for financial institutions.