Financial Crime World

Risk-Based Approach Guidance for Banking Sector: AML/CFT Compliance

Introduction

The banking sector plays a crucial role in combating money laundering (AML) and terrorism financing (CFT). To effectively tackle these global threats, financial institutions and regulatory bodies must adopt a risk-based approach to AML/CFT compliance. This approach ensures that resources are allocated efficiently to address specific risks.

Key Principles

  • Financial Inclusion: Financial exclusion can affect both individuals and businesses, and institutions should not apply simplified due diligence measures solely based on financial exclusion.
  • Risk-Based Approach (RBA): An RBA to AML/CFT aims to develop prevention or mitigation measures that are commensurate with the identified money laundering/terrorist financing risks.

Effective Supervision

Supervisory authorities should allocate their resources to areas of higher ML/TF risk and have on-site and off-site access to all information relevant to determining a bank’s risk profile. This ensures that high-risk institutions receive closer scrutiny, while low-risk ones are not unduly burdened with unnecessary regulations.

Exemptions and Guidance

  • Proven Low Risk Exemption: Countries can, in strictly limited circumstances where there is a proven low risk of ML/TF, decide not to apply certain FATF Recommendations to a particular type of financial institution or activity.
  • Guidance for Supervisors: The European Supervisory Authorities and the Basel Committee on Banking Supervision have published guidance on RBA supervision that outlines what this entails and lists self-assessment questions supervisors may ask themselves when reviewing their approach.
  • FATF Guidance: The FATF has provided a general framework for the application of the RBA by supervisors and the banking sector, which should be used in conjunction with more detailed guidelines on implementation.

Conclusion

The risk-based approach is designed to ensure that financial institutions and regulatory bodies allocate their resources effectively to address the specific money laundering and terrorist financing risks they face. By adopting this approach, banks can reduce the likelihood of AML/CFT breaches while minimizing unnecessary burdens on low-risk entities.