
The Evolution of AML Compliance from Checkbox to Risk-based Approach

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Financial institutions are exposed to several money laundering threats, as criminals today are well-equipped with various techniques to bypass the safeguards to combat them. Financial firms should promptly respond to threats to balance efficiency, cost and compliance obligations. The most efficient way to accomplish this goal is to adopt a Risk-based Approach (RBA), which entails an AML programme tailored to the levels of risk that a customer poses.
Banks and other financial organisations managed their legal responsibilities with a “checkbox” approach, which involved merely satisfying a set of uniform AML standards for each customer. Although the 1990s saw the dominance of that standardised method, the UK’s Financial Services Authority (FSA) initially put forth a “risk-based” strategy in its publication, “A New Regulator for the New Millennium”. The Financial Action Task Force (FATF) introduced the idea of a risk-based approach in 2007. It was further codified in FATF’s 2012 update to the “International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation”, or the ‘40 Recommendations’. The risk-based approach to AML was endorsed by the FATF in 2012, setting the global norm and ensuring its continued implementation among all FATF member states.
The RBA emphasises AML compliance towards proactive judgement instead of retrospective data analysis. Financial firms must assess the money laundering risk efficiently and implement robust risk management strategies.
In practice, this implies that each customer can be categorised according to risk exposure and that ‘higher risk’ clients are subject to Enhanced Due Diligence (EDD). The risk-based approach to Anti-money Laundering (AML) generally enables financial institutions to:
When adequately applied, the risk-based approach enables a harmonious combination of human judgement and sophisticated technology in the AML process.
The risk-based approach to AML relies on proper risk assessment, and two primary types of risk influence financial organisations’ compliance efforts. The first is geographic risk, a nation’s susceptibility to money laundering issues. The second is a personal risk, which relates to the dangers financial institutions encounter from their customers and how their AML procedure controls those risks.
Financial institutions must consider the following factors when conducting risk assessments:
Financial firms must adopt a risk-based approach to comply with the FATF recommendations. They should:
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