Supervisors Must Identify and Mitigate Money Laundering and Terrorist Financing Risks

In an effort to combat money laundering and terrorist financing (ML/TF), supervisors must have a thorough understanding of the risks within their sector or entity. This includes identifying ML/TF risks at the sectoral, entity, and individual levels.

Understanding the Risk-Based Approach

According to new guidance from the Financial Action Task Force (FATF), supervisors must assess and understand ML/TF risks in order to mitigate them effectively on an ongoing basis. This involves implementing a sound risk assessment system that enables the identification, measurement, control, and monitoring of ML/TF risks.

Adjusting Measures Based on Risk

The FATF emphasizes the importance of a risk-based approach to AML/CFT supervision, which requires supervisors to adjust their measures based on the potential risks. For example, different types of ownership may require varying levels of scrutiny.

Clear Guidance and Education

In addition, the guidance highlights the need for clear guidance, education, and innovative outreach strategies to regulated entities regarding their ML/TF risks and AML/CFT obligations. This enables supervisors to promote the application of risk-based AML/CFT obligations as broadly as possible.

Effective Supervisory Frameworks

The FATF also notes that a variety of supervisory frameworks are available, including single AML/CFT supervisors, integrated supervision, and decentralized models. While each model has its benefits and challenges, it is critical for jurisdictions to develop a framework that effectively addresses ML/TF risks.

Key Characteristics of an Effective Risk-Based Supervisory Framework

• Identifying, Assessing, and Understanding ML/TF Risks: Identify ML/TF risks within the sector or entity
• Implementing a Sound Risk Assessment System: Develop and implement a system for identifying, measuring, controlling, and monitoring ML/TF risks
• Developing a Supervisory Strategy: Direct supervisor attention to high-risk areas
• Effective Resource Allocation: Allocate resources based on risk assessments

Conclusion

Overall, the FATF guidance emphasizes the importance of a risk-based approach to AML/CFT supervision, which requires supervisors to have a thorough understanding of ML/TF risks within their sector or entity. By implementing an effective supervisory framework and promoting risk-based AML/CFT obligations, supervisors can play a critical role in combating money laundering and terrorist financing.