Financial Crime World

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ML/TF Risk: A Growing Concern in the Financial Sector

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As the financial sector continues to evolve, it’s essential that its approach to managing money laundering and terrorist financing (ML/TF) risks keeps pace. The FATF Recommendations require a risk-based approach (RBA), which involves identifying, assessing, and mitigating ML/TF risks.

Applying a Risk-Based Approach

When applying an RBA, banks, countries, and competent authorities must decide on the most appropriate and effective way to mitigate identified ML/TF risks. This means taking enhanced measures to manage higher-risk situations and simplified measures for low-risk situations.

  • Countries seeking to exempt certain institutions or activities from AML/CTF obligations must assess the associated ML/TF risk and demonstrate a proven low risk of money laundering and terrorist financing.
  • Supervisors must allocate resources based on identified ML/TF risks and ensure that their approach is conducive to banks applying an RBA.

Financial Inclusion and Risk-Based Approach

The RBA can contribute to greater transparency and traceability of financial flows, thereby promoting financial inclusion. By allowing for a more targeted approach to AML/CFT measures, the RBA can help reduce the burden on financial institutions while still ensuring effective risk management.

Supervisory Guidance

The Basel Committee on Banking Supervision (BCBS) has published guidelines on sound management of risks related to money laundering and financing of terrorism. These guidelines support the implementation of the International Standards on Combating Money Laundering and the Financing of Terrorism issued by the FATF in 2012.

Conclusion

The RBA is a critical component of effective ML/TF risk management in the financial sector. By adopting this approach, banks, countries, and supervisors can ensure that their AML/CFT measures are proportionate to the identified risks and contribute to a safer and more transparent financial system.

Sources:

  • European Supervisory Authorities’ Preliminary report on anti-money laundering and counter financing of terrorism risk-based supervision
  • Basel Committee on Banking Supervision’s guidelines on sound management of risks related to money laundering and financing of terrorism