Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT): A Risk-Based Approach

Introduction

Financial institutions must take comprehensive steps to identify, assess, mitigate, and manage Money Laundering/Financing of Terrorism (ML/FT) risks. This is essential to prevent financial crimes and maintain a safe and secure financial system.

Risk Identification

Financial institutions must thoroughly evaluate ML/FT risks by considering various factors such as:

• Products/services offered
• Transaction types
• Countries/geographic areas
• Customer attributes

This comprehensive evaluation helps identify potential risk areas that may be vulnerable to ML/FT activities.

Factors to Consider in Risk Identification

• Product complexity and usage patterns
• Geographic regions with high ML/FT risks
• High-risk customer categories (e.g. Politically Exposed Persons)
• Transaction types with high ML/FT potential (e.g. cash transactions)

Risk Assessment

Based on the risk identification results, financial institutions must assess the level of ML/FT risks and break down wide-ranging risks into smaller categories for more effective management.

Key Steps in Risk Assessment

1. Evaluate the likelihood and impact of ML/FT risks
2. Categorize risks based on severity and priority
3. Identify risk mitigation measures to address high-priority risks

Risk Mitigation

Financial institutions must implement measures to mitigate identified ML/FT risks by collecting and verifying customer information, comparing it with risk assessment results, and determining effective mitigation measures.

Key Risk Mitigation Measures

• Customer Due Diligence (CDD): identify and assess ML/FT risks specific to customers
• Enhanced measures: required for high-risk situations or customer categories
• Simplified measures: allowed for lower-risk situations

Regulatory Requirements

Financial institutions must involve their Board in the processes of risk assessment and obtain approval for documenting results.

Key Regulatory Requirements

• Regular review and update of risk assessments
• Documentation of risk mitigation measures
• Board involvement in risk assessment and approval of results

Conclusion

These guidelines emphasize the importance of a risk-based approach to managing ML/FT risks in financial institutions. By comprehensively evaluating, assessing, mitigating, and managing risks, financial institutions can prevent financial crimes and maintain a safe and secure financial system.