Financial Crime World

Financial Institutions Face High Risks in Cash Transactions and Virtual Assets

In an effort to combat money laundering and terrorist financing, financial institutions (DNFBPs) are being urged to review and update their risk assessments regularly. According to new regulations, cash transactions and transactions involving virtual assets such as cryptocurrencies like Bitcoin are considered high-risk activities.

Understanding the Risks

The regulations require DNFBPs to rely on an appropriate methodology to identify, assess, and understand ML/TF risks. This methodology should also assist in addressing these risks faced by the institution.

A Four-Step Process for Risk Assessment

To achieve this, DNFBPs must follow a four-step process:

Step 1: Provide Business Insights

  • DNFBPs must provide insights about their business operations, including:
    • Number of employees
    • Jurisdictions where they operate
    • Type of customers
    • How they onboard customers
    • Specifics about the products or services offered to customers This will help identify specific risk categories such as:
    • Customers
    • Countries or geographical locations
    • Products
    • Services
    • Transactions
    • Delivery channels

Step 2: Review and Clarify with a Compliance Officer

  • DNFBPs must schedule an interview with a Compliance Officer to review their answers and iron out any unclear points.

Step 3: Identify Likelihood of Risk Materialization

  • DNFBPs must identify the likelihood that each type of risk will materialize. For example, with respect to customers, the likelihood may be high if there is a history of misuse for money laundering or terrorism financing purposes.

Step 4: Assess Impact and Likelihood of Occurrence

  • DNFBPs must assess the impact of each risk factor and its likelihood of occurrence using a five-staged category system:
    • Negligible: The service cannot be used in facilitating illegal activities with minor consequences.
    • Minor: The service can be used directly or indirectly to fund criminal activities with moderate impact.
    • Moderate: The service can be used directly or indirectly to fund criminal activities with significant impact, such as serious financial crime.
    • Significant: The service can be used directly or indirectly to fund criminal activities with severe impact, resulting in loss of lives or human well-being.
    • Severe: The service can be used directly or indirectly to fund an illicit activity that may result in loss of lives or have a severe impact on human well-being.

Conclusion

By following this process, DNFBPs can gain a better understanding of their ML/TF risks and take steps to mitigate them.