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Read the GuideA risk-based approach to AML is key to effective compliance programs around the world.
Financial institutions face an expanding spectrum of money laundering threats, and modern financial criminals have a range of tools at their disposal to avoid countermeasures put in place to stop them. Accordingly, to balance efficiency and cost needs with compliance obligations, financial institutions must be able to respond to threats on a contextual basis. The most effective way to achieve that objective is to take a risk-based approach, meaning an AML compliance program tailored to each customer’s individual levels of risk exposure.
Before introducing risk-based approaches to AML, banks and financial institutions would manage their compliance obligations using a ‘checkbox’ approach – that is, simply fulfilling a standardized list of AML requirements for every customer. While that standardized approach prevailed in the 1990s, the UK’s Financial Services Authority (FSA), first proposed a “risk-based” approach in its 2000 publication A New Regulator for the New Millennium. The concept of risk-based AML was first implemented in 2007 by the Financial Action Task Force and further codified in its 2012 update to the International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation – also known as the ‘40 Recommendations’.
The FATF’s 2012 endorsement of the risk-based approach to AML set the global standard and ensured its ongoing use across all FATF member-states.
This 5-part training series is designed to enable you to mitigate risks you may encounter during the customer onboarding process. Learn more and earn a certificate at the end.
Read the GuideIn principle, the risk-based approach to AML shifts the focus of AML compliance from post-analysis of data to proactive judgment. Financial institutions must work on an ongoing basis to understand the money laundering threats they face and deploy commensurate measures to manage their risk exposure.
In practice, this means that customers may be classified individually by their risk exposure – and that ‘higher risk’ customers are under greater levels of AML scrutiny. Broadly, the risk-based approach to AML allows financial institutions to:
Implemented effectively, the risk-based approach allows for a balanced integration of human judgment and smart technology in the AML compliance process.
An accurate risk assessment is central to the risk-based approach to AML. Two distinct categories of risk inform financial institutions’ compliance efforts. The first is the idea of geographic risk: the vulnerability to money laundering threats that countries face at a national level. The second is the idea of individual risk, the specific risks financial institutions face from their clients, and how their internal AML process manages that risk. In performing risk assessment, financial institutions must take into account:
Business Specifics: Are there more specific risks to which the firm might be exposed – for example, those presented by specific customers, products, or geographic locations?
In compliance with the FATF recommendations, financial institutions must implement a risk-based AML program that includes a number of important measures, each designed to identify individual customers and clients accurately, and the businesses in which they are involved. In more detail, financial institutions must:
Ongoing monitoring: The risk-based approach to AML compliance is a process, which means customers should be subject to ongoing monitoring throughout the business relationship. Ongoing monitoring is important because customers’ risk profiles can change over time. Financial institutions must be able to react to new levels of risk exposure to ensure emerging money laundering threats are identified as quickly as possible.
Automate onboarding and monitoring processes, whilst minimizing false positives, by utilizing a live global AML database of Sanctions and Watchlists, Politically Exposed Persons and Adverse Media.
Request DemosOriginally published 16 August 2019, updated 12 February 2024
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