Here is the article in markdown format:
Financial Institutions’ AML/CT Controls Under Scrutiny Amid Operational Risks
A comprehensive risk assessment is crucial for financial institutions to identify and mitigate the risks associated with money laundering (ML) and terrorist financing (TF). However, a recent report highlights the impact of significant strategy and operational changes, as well as national risk assessments, on the likelihood of breakdowns in key AML/CT controls.
Detailed Analysis Key to Accurate Risk Assessment
In the second step of the risk assessment process, financial institutions must conduct a detailed analysis of their activities, including:
- The number of domestic and international funds transfers
- Customer types
- Geographic locations
- Transaction data
This exercise helps to identify varying levels of risk within different products or categories of customers.
Risk Matrix Crucial for Effective Risk Management
Institutions should also develop a likelihood versus impact matrix to determine the level of effort or monitoring required for identified inherent risks. A risk matrix can be used to classify ML/TF risks into low, moderate, and high zones, allowing financial institutions to identify areas that require additional attention.
Evaluation of AML/CT Program Critical
The third step involves evaluating internal controls to ensure they effectively mitigate identified risks. Controls should be assessed for design and operating effectiveness, with a focus on business unit or business line self-assessments. This process helps to identify weaknesses in the control environment and inform remediation efforts.
Residual Risk Determination Crucial
Once inherent risk and control effectiveness have been considered, residual risk must be determined. Residual risk is the risk that remains after controls are applied to inherent risk. A 3-tier rating scale or a 5-point scale can be used to evaluate residual risk, providing insights into whether ML/TF risks within an institution are being adequately managed.
Reporting Requirements
The results of the ML/TF risk assessment must be presented to senior management and the board, as well as communicated to all business units and control functions. The report should highlight:
- Inherent and residual risk
- Control effectiveness
- For any part of the institution’s business
Additionally, institutions are required to submit an annual report on their ML/TF risk assessment to the Central Bank of Kenya by December 31st.
Conclusion
A thorough AML/CT risk assessment is essential for financial institutions to identify and mitigate the risks associated with ML and TF. The detailed analysis, risk matrix, evaluation of the AML/CT program, residual risk determination, and reporting requirements all play critical roles in ensuring effective risk management and compliance with regulatory requirements.
Contact Information
For any queries or clarification regarding the report, please contact:
- The Director, Bank Supervision Department
- Central Bank of Kenya P. O. Box 60000 - 00200, Nairobi
- Tel: 2860000 Email: fin@centralbank.go.ke