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Importance of Risk Assessment in Finance: Meeting Canada’s Anti-Money Laundering Expectations
According to Canada’s anti-money laundering legislation, financial institutions must conduct a risk assessment of their respective money laundering and terrorist financing risks. The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) is responsible for enforcing this legislation and examining how Canadian financial institutions conduct risk assessments.
The Landscape of Money Laundering and Fraud
As the landscape of money laundering, fraud, terrorist financing, and financial irregularities becomes increasingly complex, FINTRAC is adapting its review process to meet these new challenges. This means that financial institutions must ensure their risk mitigation measures and processes are adequate to identify and mitigate high-risk transactions and clients.
The Basics of Anti-Money Laundering Legislation
Anti-money laundering legislation aims to combat the act of taking illegal funds and making them appear as legitimate income. Financial institutions, due to their proximity to funds, have a significant responsibility in preventing money laundering and terrorist financing.
FINTRAC’s Enhanced Risk Assessment Expectations
When FINTRAC reviews your risk assessment compliance, it expects you to demonstrate a thorough understanding of every element of your institution’s risk assessment framework. This includes explaining:
- Your financial institution’s decision process
- The technologies used to assess risks
- Any unique elements that pose a high risk
Customizing Automated AML Compliance Tools
FINTRAC expects financial institutions to customize their automated anti-money laundering compliance tools to suit their unique business model. This customization should consider:
- Products and services
- Delivery channels
- Geographies
- New developments
- Other relevant risks to the business
Consequences of Inadequate Risk Assessment
Failure to adequately assess risk can lead to financial institutions being unable to identify high-risk transactions and clients, leaving them vulnerable to money laundering and terrorist financing. It is crucial that financial institutions prioritize adequate risk assessment to ensure compliance with FINTRAC’s regulations.
Best Practices for Effective Risk Assessment
Financial institutions best poised to address the new realities of enhanced risk assessments share several characteristics:
- Human capital: Ensure staff members are trained and equipped to effectively use automated AML compliance tools.
- Convergence: Foster effective communications and collaboration between disparate organizational teams.
- Know Your Customer (KYC) consistency: Ensure primary core banking software systems feed real-time information on client KYC.
- Unbiased external advisors: Engage with external third-party experts to identify gaps in processes and provide recommendations for improvement.
Conclusion
Meeting FINTRAC’s anti-money laundering expectations requires financial institutions to prioritize effective risk assessment. By customizing automated AML compliance tools, ensuring adequate human capital, fostering convergence, maintaining KYC consistency, and engaging with unbiased external advisors, financial institutions can ensure compliance with FINTRAC regulations and prevent money laundering and terrorist financing.
Contact Us
If you are struggling to adapt to the new realities of risk assessment or are concerned about answering the questions FINTRAC will ask at your next examination, our AML advisory team is here to help. Contact us today to identify your needs and execute a plan to improve your risk assessment process.