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Risk-Based Approach to Financial Crime in United States Gains Momentum as FATF Updates Guidance

The Financial Action Task Force (FATF) has been at the forefront of developing a comprehensive framework for combating money laundering and terrorist financing through its risk-based approach. In a significant move, the FATF is reviewing its guidance papers on this critical aspect, with a focus on refining its recommendations to better equip financial institutions and public authorities in their fight against financial crime.

A Brief History of the Risk-Based Approach

The original Guidance on Risk-Based Approach was published by the FATF in June 2007, following close consultations with representatives from the international banking and securities sectors. The document aimed to provide a common understanding of what the risk-based approach entails, outlining high-level principles for its application and highlighting good public and private sector practices.

Revisions and Updates

Fast forward to 2012, when the FATF adopted revised Recommendations that set in motion the process of reviewing its RBA guidance papers. This led to the adoption of a dedicated Risk-Based Approach for the Banking Sector in October 2014. The development of separate guidance for the Securities Sector is also underway.

Purpose and Structure of the Guidance

The purpose of this Guidance is multifaceted:

• It supports the development of a shared understanding among stakeholders
• Outlines high-level principles for applying the risk-based approach
• Indicates best practices in its design and implementation

Targeted at public authorities and financial institutions, yet applicable to designated non-financial businesses and professions, the Guidance is structured into three interdependent sections:

• Section one provides the foundation for interpreting sections two (Guidance for Public Authorities) and three (Guidance for Financial Institutions)
• Annex 1 offers descriptions of additional sources of information

Key Elements of an Effective Risk-Based Approach

The Guidance aims to set out key elements of an effective risk-based approach, highlighting issues that both public authorities and financial institutions may wish to consider when applying this approach. Crucially, it acknowledges the unique needs of each country and its national authorities, emphasizing the importance of tailoring a regime to address individual country risks.

Future Direction

While the Guidance does not provide a single model for the risk-based approach, it offers a framework based on high-level principles and procedures that countries may wish to consider when applying this approach. Ultimately, this refined framework is expected to bolster efforts in combating financial crime, as the United States continues its commitment to protecting its financial system from illicit activities.