Financial Institutions Face Growing Risk of Money Laundering, Terrorist Financing, and Proliferation Financing

A recent report by the Central Bank of Bahrain highlights the increasing vulnerability of financial institutions to money laundering (ML), terrorist financing (TF), and proliferation financing (PF). The risk assessment emphasizes the importance of a robust approach to identifying, managing, and mitigating these risks.

Understanding the Risks

Financial institutions must assess country/geographic risk, customer/investor risk, product/service/transactions risk, and distribution channel risk. Country/geographic risk is particularly significant, with factors such as corruption, organized crime, and weak governance regimes contributing to a higher risk profile.

Identifying High-Risk Customers

The report identifies categories of customers that may indicate a higher risk, including:

• Non-resident customers
• Legal persons or arrangements with unusual ownership structures
• Businesses with cash-intensive activities

Gathering Information

Financial institutions must consider quantitative and qualitative information from internal and external sources, including:

• National risk assessments
• Sectorial risk assessments
• Crime statistics
• Typologies
• Risk indicators
• Red flags
• Guidance and advisories issued by inter-governmental organizations

Implementing Effective Controls

The report’s findings highlight the need for financial institutions to implement robust policies, controls, and procedures to manage and mitigate these risks. This includes:

• Conducting regular risk assessments
• Monitoring customer transactions
• Reporting suspicious activities to relevant authorities

Conclusion

The increasing risk of ML/TF/PF poses a significant threat to the stability of the financial system. Financial institutions must remain vigilant and proactive in identifying, managing, and mitigating these risks to ensure compliance with anti-money laundering and combating the financing of terrorism (AML/CFT) regulations.

Key Takeaways:

• Financial institutions are vulnerable to ML/TF/PF due to country/geographic risk, customer/investor risk, product/service/transactions risk, and distribution channel risk.
• Country/geographic risk is particularly significant, with factors such as corruption, organized crime, and weak governance regimes contributing to a higher risk profile.
• Categories of customers that may indicate a higher risk include non-resident customers, legal persons or arrangements with unusual ownership structures, and businesses with cash-intensive activities.
• Financial institutions must implement robust policies, controls, and procedures to manage and mitigate these risks, including conducting regular risk assessments, monitoring customer transactions, and reporting suspicious activities to relevant authorities.