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Financial Firms Must Confront High-Risk Transactions
To combat money laundering and terrorist financing, financial institutions must adopt a robust methodology to identify, assess, and mitigate risks associated with their products and services.
New Regulations: Regular Risk Assessments Required
According to new regulations, financial firms must update their risk assessment regularly before offering new products or services, using new delivery channels, or adopting new technologies. The risk assessment process involves several steps:
- Step 1: Provide Business Operation Insights
- Identify specific information about business operations, such as:
- Number of employees
- Jurisdictions where they operate
- Type of customers
- Products or services offered
- Identify risk categories, including:
- Customers
- Countries
- Products
- Services
- Transactions
- Delivery channels
- Identify specific information about business operations, such as:
- Step 2: Clarify Unclear Points with a Compliance Officer
- Schedule an interview to review answers provided in Step 1 and clarify any unclear points
- Step 3: Assess the Likelihood of Risk Materializing
- Identify the likelihood that specific types of risks will materialize, such as:
- High risk of misuse for money laundering and terrorist financing purposes if it occurs several times a year
- Identify the likelihood that specific types of risks will materialize, such as:
- Step 4: Map Risks to Factors and Assess Likelihood
- Map identified risks to different factors and assess the likelihood of these risks occurring using a five-staged category system
- Consider the impact of each risk factor, including:
- Financial damage from crime
- Regulatory sanctions
- Reputational damage
Risk Categorization and Assessment
The assessment categorizes risks into four levels:
- Negligible: Little to no impact on the business
- Minor: Some impact on the business, but manageable
- Moderate: Significant impact on the business, requiring attention
- Severe: High impact on human well-being or loss of lives
Financial institutions must list down all identified risks and reassess their likelihood of occurrence.
Multiple Sources of Information
The regulations emphasize that financial firms should consider multiple sources of information when identifying ML/TF risk factors. The type and number of sources used should be determined on a risk-sensitive basis.
Conclusion
By adopting this robust methodology, financial institutions can effectively identify, assess, and mitigate high-risk transactions associated with money laundering and terrorist financing.