Financial Crime World

Addressing TF Risks: Experts Warn of the Importance

In an effort to combat money laundering and terrorist financing (ML/TF), experts are stressing the importance of addressing TF risks through a legal and regulatory framework that provides guidance on discretion.

Effective Communication Crucial for Implementation

The successful implementation of a Risk-Based Approach (RBA) depends on ongoing and effective communication between competent authorities and banks. This includes acknowledging that not all banks will adopt identical AML/CFT controls, as each institution’s risk profile is unique.

  • Ongoing communication is key to ensuring the RBA is implemented effectively
  • Each bank’s risk profile is unique, requiring tailored AML/CFT controls

Single Incident Does Not Invalidate Integrity

Experts caution that a single isolated incident of insignificant or crystallized risk does not necessarily invalidate the integrity of a bank’s AML/CFT controls. On the other hand, banks must understand that a flexible RBA does not exempt them from applying effective AML/CFT controls.

  • A single incident is not enough to invalidate a bank’s AML/CFT controls
  • Banks must still apply effective AML/CFT controls even with a flexible RBA

Supervision Key to Maintaining a Level Playing Field

Countries and competent authorities must ensure effective supervision of all entities covered by AML/CFT requirements to maintain a level playing field between banking service providers. This will prevent higher-risk activities from shifting to institutions with insufficient or inadequate supervision.

  • Effective supervision is crucial for maintaining a level playing field
  • Supervision prevents high-risk activities from shifting to unsupervised institutions

Financial Exclusion Does Not Equate to Low ML/TF Risk

Contrary to popular belief, financial exclusion does not automatically equate to low or lower ML/TF risk. Financial exclusion can affect both individuals and businesses, and institutions must not apply simplified due diligence measures or exemptions solely based on a customer’s financial exclusion status.

  • Financial exclusion is not equivalent to low ML/TF risk
  • Institutions must not use financial exclusion as a basis for simplified due diligence

RBA Fosters Financial Inclusion

A Risk-Based Approach may help foster financial inclusion, especially for low-income individuals who struggle to access the regulated financial system. Countries may establish specific cases for exemptions in the application of FATF Recommendations or allow financial institutions to be more flexible in their CDD measures when dealing with lower ML/TF risks.

  • A RBA can help foster financial inclusion
  • Exemptions and flexibility can be applied to promote financial inclusion

Supervisors Must Allocate Resources Wisely

The RBA aims to develop prevention or mitigation measures commensurate with identified ML/TF risks. Supervisory authorities must allocate resources accordingly and discharge their functions in a way that is conducive to the application of a risk-based approach by banks.

  • Supervisors must allocate resources wisely to support a RBA
  • Resources should be allocated based on identified ML/TF risks

FATF Guidance Crucial for Implementation

The FATF Guidance on Anti-Money Laundering and Terrorist Financing Measures and Financial Inclusion provides a general framework for the application of the RBA, while the Basel Committee on Banking Supervision’s guidelines offer further support. Experts emphasize that these guidelines are essential for ensuring effective implementation of AML/CFT measures.

  • The FATF Guidance is crucial for implementing a RBA
  • Guidelines from the Basel Committee provide additional support

As experts warn, addressing TF risks is crucial to preventing financial crimes and maintaining financial stability. By implementing a risk-based approach, banks, supervisors, and authorities can work together to mitigate ML/TF risks while promoting financial inclusion.