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?
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.
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