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Banks Must Take Risk-Based Approach to Combat Money Laundering and Terrorism Financing

In an effort to combat money laundering and terrorism financing, banks must adopt a risk-based approach (RBA) to mitigate these risks. According to the Financial Action Task Force (FATF), when applying an RBA, banks, countries, and competent authorities must decide on the most appropriate and effective way to manage and mitigate situations where the risk is higher.

Risk Assessment Key

Countries looking to exempt certain institutions, sectors or activities from AML/CTF obligations must assess the ML/TF risk associated with these financial institutions, activities or designated non-financial businesses and professions (DNFBPs) and demonstrate that the risk is low. The complexity of the risk assessment will depend on the specific circumstances.

Supervisors Must Play Key Role

Supervisors must allocate their resources to areas of higher ML/TF risk and have access to all relevant information to determine a bank’s risk profile. This approach aims to develop prevention or mitigation measures that are commensurate with the identified risks.

Global Guidance Issued

The FATF has issued guidance on the application of the RBA by supervisors, which provides a general framework for the banking sector and supervisors to follow. The Basel Committee on Banking Supervision (BCBS) has also published guidelines on the management of risks related to money laundering and financing of terrorism within banks’ overall risk management framework.

Financial Inclusion Must Be Balanced

In implementing the RBA, financial inclusion policies must be balanced with effective ML/TF prevention measures. The FATF’s Guidance on Anti-Money Laundering and Terrorist Financing Measures and Financial Inclusion highlights that financial inclusion will contribute to greater transparency and traceability of financial flows.

Conclusion

The adoption of a risk-based approach is crucial in combating money laundering and terrorism financing. Banks, countries, and competent authorities must work together to identify and mitigate these risks. The FATF’s guidance provides a framework for supervisors and the banking sector to follow, ensuring that effective measures are taken to prevent and detect ML/TF activities.

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