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High-Risk Countries and Geographic Areas Designated by FATF: A Guide for Financial Institutions
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In an effort to combat money laundering (ML) and terrorist financing (TF), the Financial Action Task Force (FATF) has designated certain countries and geographic areas as high-risk. This designation is crucial for financial institutions, as it helps them understand the magnitude of ML/TF risks associated with their products and services.
Understanding Risk
Before offering new products or services, financial institutions must evaluate the AML/CFT risks associated with such offerings. This includes assessing the effectiveness of risk control frameworks among alliance partners, other partners, contractors, and companies being acquired.
Risk Assessment
Risk assessment is a critical process for financial institutions to identify ML/TF risks and formulate mitigation measures. The assessment should reflect the characteristics of the institution’s business environment and strategy.
Required Actions for Financial Institutions
Establishing Risk Assessment Policy
- Establish an enterprise-wide policy and specific methods for risk assessment.
- Conduct assessments of identified ML/FT risks based on factual, concrete, and objective evidence in accordance with the established policy and methods.
- Analyze the status of suspicious transaction reporting and document results.
- Utilize results for developing measures necessary for risk mitigation.
- Conduct regular reviews of risk assessments at least once a year or when significant events occur.
Expected Actions for Financial Institutions
Visualizing Risk Assessments
- Break down risks into smaller categories, assess risks for each category, and reassess them by combining results to visualize the firm-wide risk assessment in a risk map.
Risk Mitigation
Risk mitigation measures must be implemented according to the level of risks posed by individual customers and transactions. Enhanced measures are required when high risks are identified, while simplified measures are allowed when lower risks are detected.
Implementing Risk Mitigation Measures
- Collect and verify information about customers and their activities and transactions, compare that information with the results of risk assessment, and determine and implement effective measures to mitigate identified risks.
- Undertake enhanced mitigation measures in cases where ML/FT risks are high, commensurate with the level of risks posed by individual customers and their transactions.
- Examine updated cases and information from domestic and foreign authorities and industry associations, and then undertake mitigation measures commensurate with the risk faced.
Customer Due Diligence (CDD)
CDD is a critical component of risk mitigation measures, involving a series of processes to identify and assess ML/FT risks associated with specific customers. Financial institutions must collect and verify fundamental information about customers and their transactions in light of the results of risk assessment and determine measures necessary to mitigate identified risks.
By understanding high-risk countries and geographic areas designated by FATF, financial institutions can take proactive steps to mitigate ML/TF risks and ensure compliance with international standards.