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Financial Institutions Must Prioritize Anti-Money Laundering and Combating Financing of Terrorism Regulations
As the global economy continues to evolve, financial institutions must remain vigilant in their efforts to prevent money laundering and financing of terrorism. In this regard, regulatory bodies have emphasized the importance of implementing effective anti-money laundering (AML) and combating financing of terrorism (CFT) programs.
Directors’ Responsibilities
Financial institution directors are expected to demonstrate their commitment to AML/CFT by:
- Understanding their statutory duties
- Approving policies and procedures that align with the risks faced by the institution
- Appointing a Compliance Officer
- Ensuring compliance with local laws and regulations
- Reviewing reports from the Compliance Officer, internal audit, external auditors, and supervisory authorities
Senior Management’s Role
Senior management, in collaboration with the Compliance Officer, is responsible for developing sound risk management programs that provide:
- A thorough understanding of customers’ business and financial transactions
- A permit to detect unusual and suspicious transactions
- A knowledge of customer relationships
Policies and Procedures
Financial institutions are required to formally document policies and procedures that address various aspects of AML/CFT, including:
• Opening customer accounts and verifying customer identity • Establishing business relations with third parties (correspondent banks, business introducers) • Determining business relationships to be accepted or rejected • Timely detection of unusual and suspicious transactions • Internal reporting • Record retention
Risk-Based Framework
The Financial Action Task Force (FATF) recommends that financial institutions adopt a risk-based approach to customer due diligence. This involves developing a framework that assesses the level of potential risk each client relationship poses to the institution.
Components of Risk-Based Framework
A risk-based framework should include:
• Segregation of client relationships by risk categories • Differentiation of client relationships by risk factors (products, client type, country of domicile, etc.) • Know your customer (KYC) documentation and due diligence information requirements • A process for approving changes to customer risk ratings
Ongoing Review
The risk rating framework should provide for periodic review of the customer relationship to ensure that any adjustments are made to the customer risk rating. High-risk customers must be reviewed more frequently than others.
By prioritizing these regulations, financial institutions can minimize their exposure to money laundering and terrorist financing risks, ensuring a safer and more stable global economy.