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Financial Institutions Urged to Adopt Holistic Approach to Money Laundering and Terrorist Financing Risk Management
In an effort to mitigate the risks associated with money laundering (ML) and terrorist financing (TF), financial institutions have been advised to adopt a holistic approach to risk management.
Understanding ML/TF Risk Assessment Process
According to industry experts, the ML/TF risk assessment process involves:
- Identifying and analyzing potential risks
- Determining priorities for addressing them
- Developing strategies for mitigation
This comprehensive approach is crucial in ensuring that financial institutions are equipped to effectively manage these risks and prevent them from materializing.
Assessing ML/TF Risks
Financial institutions have been urged to take a broad view when assessing ML/TF risks, covering all existing and new products and services offered by the institution. This includes considering factors such as:
- Geographical location
- Customer type
- Product and service type
- Delivery channel
- Transaction type
Structured Approach to Assessing Risks
The likelihood and consequence of potential risks should also be assessed using a structured approach, including:
- Calculating the magnitude of potential consequences
- Determining the likelihood of their occurrence
By combining these factors, financial institutions can determine the ultimate level of risk associated with a particular business relationship or transaction.
Threat and Vulnerability Assessment
Industry experts have emphasized the importance of considering both threat and vulnerability when assessing ML/TF risks. For example:
- Domestic tax evasion criminals may be considered as a threat
- Accounts dealing with cash payments may be viewed as a vulnerability
Risk Matrix
Financial institutions have been advised to use a risk matrix to assess the likelihood and consequence of potential risks. The illustrative risk matrix provided by industry experts includes a scale for both likelihood and consequence, ranging from minimal to severe.
| Consequence Scale | Likelihood Scale |
|---|---|
| Minimal (1) | Very Unlikely (1) |
| Minor (2) | Unlikely (2) |
| Moderate (3) | Likely (3) |
| Significant (4) | Very Likely (4) |
| Severe (5) | Most Likely (5) |
Institutional Risk Rating
The institution’s overall risk rating can then be computed by combining all the inherent risks assessed for each category of risk. Financial institutions have been advised to give more weight to certain risk categories or sub-categories to provide a more nuanced understanding of ML/TF risk.
| Institutional Risk Rating | |
|---|---|
| Low (1-3) | Medium-Low (4-7) |
| Medium (8-13) | Medium-High (14-21) |
| High (22-25) |
Conclusion
By adopting a comprehensive approach to ML/TF risk management, financial institutions can better protect themselves and the wider financial system from the risks associated with money laundering and terrorist financing.