Financial Crime World

Regulatory Framework for Risk-Based Approach in Conventional Banks

Overview

The Central Bank of Bahrain Rulebook Volume 1 outlines a risk-based approach for conventional banks in the Financial Crime chapter (FC-C). Sections FC-C.2 and FC-C.2.5 through FC-C.2.7 focus on the Risk Assessment aspect of this framework.

Key Points: Enhanced Measures for Higher ML/TF Risks

  • Implement enhanced measures: Banks must implement additional measures when higher Money Laundering/Terrorist Financing (ML/TF) risks are identified.
  • Regular risk assessments and mitigation strategies: Perform regular risk assessments and implement mitigation strategies to address these risks.

Risk Assessment and Documentation

  • Conduct thorough risk assessments: Banks must conduct thorough risk assessments, documenting their processes and communicating them to senior management.
  • Consider internal and external sources of information: Assessments should consider various sources of information, including:
    • National risk assessments
    • Crime statistics
    • Typologies
    • Red flags
    • Guidance from international organizations like the FATF (Financial Action Task Force)
    • AML/CFT reports

Risk Categories

  • Country/geographic risk: Countries identified by credible sources as lacking adequate AML/CFT systems or providing support for terrorist activities may pose higher ML/TF risks.
  • Customer/investor risk: Assess the risk associated with customers and investors, considering factors such as corporate governance arrangements and products or services that provide anonymity or facilitate cash transactions.
  • Product/service/transactions risk: Evaluate the risk associated with specific products, services, and transactions, including the volume and size of transactions.
  • Distribution channel risk: Assess the risk associated with different distribution channels.

PEPs Consideration

  • Enhanced due diligence measures: Banks must apply enhanced due diligence measures to customers who are or have been PEPs, including:
    • Verifying the identity and beneficial ownership of these individuals
    • Ensuring they comply with relevant regulations

Summary

When considering the ownership of a bank involving PEPs, financial institutions should:

  • Implement robust risk assessments and mitigation strategies
  • Document their processes and communicate them to senior management
  • Consider various risk categories, including country/geographic, customer/investor, product/service/transactions, and distribution channel risks
  • Apply enhanced due diligence measures for PEPs

By adhering to these regulatory guidelines, banks can effectively manage the risks associated with PEPs and ensure compliance with anti-money laundering and combating terrorist financing regulations.