Financial Crime World

Risk Assessment for Investment Firms in Bahrain

Overview

The Central Bank of Bahrain’s Rulebook Volume 4: Investment Business, specifically Section FC-C.2, outlines the regulations for risk assessment by investment firm licensees in Bahrain. This article provides a comprehensive overview of the key points and requirements for effective risk management.

Documenting, Updating, and Communicating Risk Assessment

FC-C.2.3

  • The risk assessment must be properly documented.
  • It must be regularly updated to reflect changes in the business or regulatory environment.
  • The licensee must communicate the risk assessment to senior management.

Policies, Controls, and Procedures for Managing Risks

The investment firm licensee must have policies, controls, and procedures in place to manage and mitigate identified risks.

Factors to Consider in Risk Assessment

An investment firm licensee must assess country/geographic risk, customer/investor risk, product/service/transactions risk, and distribution channel risk considering factors such as:

  • Nature, scale, diversity, and complexity of business: The more complex the business, the higher the risk.
  • Products or services that provide anonymity or ability to pool underlying customers/funds: Products like anonymous accounts or funds that can be pooled from multiple sources may increase the risk of money laundering or terrorist financing.
  • Volume and size of transactions and profile of customers: Large transactions or high-risk customers may indicate a higher level of risk.
  • Proportion of high-risk customers: A high proportion of high-risk customers may increase the overall risk of the business.
  • Target markets and jurisdictions exposed to: Conducting business in jurisdictions with weak governance or high levels of corruption can increase the risk of financial crime.
  • Complexity of transaction chain and types of distributors or intermediaries: Complex transactions chains or use of intermediaries can increase the risk of money laundering or terrorist financing.
  • Distribution channels and use of technology: The use of digital platforms or other technologies can increase the speed and complexity of transactions, which may increase the risk of financial crime.

Country/Geographic Area Risk

FC-C.2.5

Country/geographic area risk includes factors such as:

  • Countries identified by credible sources as not having adequate AML/CFT systems
  • Countries providing funding or support for terrorist activities
  • Countries with significant levels of corruption or organized crime
  • Countries subject to sanctions, embargoes, or similar measures
  • Countries with weak governance, law enforcement, and regulatory regimes

Higher-Risk Customers

FC-C.2.6

Categories of customers that may indicate a higher risk include:

  • Non-resident customers: Customers from countries with high-risk profiles or those that are not well-regulated.
  • Legal persons or arrangements that are personal asset-holding vehicles: Companies set up to hold assets for individuals may be used to launder money or finance terrorism.
  • Companies with nominee shareholders or shares in bearer form: These types of companies can make it difficult to identify the true beneficial owners and increase the risk of financial crime.
  • Cash-intensive businesses: Businesses that deal in large amounts of cash, such as restaurants or bars, may be used for money laundering.
  • Ownership structure appears unusual or excessively complex: Complex ownership structures can make it difficult to identify the true beneficial owners and increase the risk of financial crime.
  • Customer is sanctioned by the relevant national competent authority: Customers who are subject to sanctions may indicate a higher level of risk.
  • Customer is a Politically Exposed Person (PEP) or family members or close associates are PEPs: PEPs may be at higher risk due to their position and influence.

Overall Risk Assessment

FC-C.2.7

An overall risk assessment should include determining the potential risks presented by product, service, transaction, or delivery channel of the investment firm licensee.

These regulations aim to ensure that investment firms in Bahrain implement effective risk management practices to mitigate financial crime and comply with Anti-Money Laundering (AML), Counter-Terrorist Financing (CTF), and Combating Proliferation Financing (CPF) requirements.