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Risk-Based Approach to Financial Crime Prevention in Netherlands
A more risk-based approach to anti-money laundering (AML) has gained widespread recognition as a necessary step towards more effective and balanced AML efforts. Despite this momentum, implementing such an approach remains a challenge for financial institutions (FIs). A key concept is the increased reliance on automated risk detection mechanisms and a more risk-differentiated review of clients.
Implementing a Risk-Based Approach
Regulators, supervisors, FIs, and law enforcement agencies are striving for a more effective AML approach that balances the need to mitigate money laundering risks with the need to avoid disturbing or disadvantageous bona fide clients. The recent risk-based roundtables and NVB Industry Baselines aim to provide guidance on operationalizing this approach.
Automated Trigger-Based Ongoing Due Diligence
One area of opportunity is in the automated trigger-based Ongoing Due Diligence (ODD) of clients. Currently, most FIs conduct manual client reviews on a periodic basis, which is time-consuming, provides limited added value to risk mitigation, and negatively impacts client satisfaction and data privacy.
Key Enablers for Operationalizing a Risk-Based ODD Framework
To operationalize a risk-based ODD framework, six key enablers are essential:
- Data quality: FIs must strive for complete and correct client data by implementing a risk-based data actualization process.
- Fit-for-purpose tooling: Risk triggers and detection mechanisms must be implemented in a stable IT environment generating valid and reliable alerts.
- Integrated design: The risk-based approach must be integrated into the enterprise-wide risk assessment, CDD policies, and procedures.
- Continuous tracking risks: Enterprise-wide risk assessments and control effectiveness must be periodically tested and validated.
- Risk-differentiated reviews: FIs should focus on triggered risks and conduct risk-differentiated reviews.
- Reporting and oversight: FIs must be transparent about their ODD approach, its outcomes, and how it fulfills regulatory requirements.
Implementing a Risk-Based Approach
To successfully implement a risk-based ODD framework, FIs must also accept that there will be missed signals for potential money laundering. However, by documenting substantiation of risk-based decisions and conclusions in a proportionate manner, they can demonstrate compliance. By operationalizing the risk-based approach, AML can become more effective, and the burden on banking clients can be reduced.
Recommendations
FIs are encouraged to re-evaluate their current ODD framework and apply the risk-based approach with well-weighted and thought-through decisions. By doing so, they can reduce the burden on banking clients and demonstrate a higher level of compliance.