Financial Crime World

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Guidance Document: Risk-Based Approach to Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT)

The Financial Action Task Force (FATF) has issued a guidance document on the application of the Risk-Based Approach (RBA) to AML/CFT by financial institutions and supervisors. This document aims to promote financial inclusion while preventing money laundering and terrorist financing.

Key Considerations

Financial Exclusion

Financial exclusion can affect both individuals and businesses, with various reasons such as a poor credit rating or a customer’s criminal background. However, these factors should not be used as sole grounds for applying simplified due diligence measures or exemptions.

Risk-Based Approach (RBA)

The RBA aims to develop prevention or mitigation measures that are commensurate to the ML/TF risks identified. In supervision, this applies to how supervisory authorities allocate their resources and discharge their functions in a way conducive to applying an RBA by banks.

Supervision

  • Recommendation 26 requires countries to subject banks to adequate AML/CFT regulation and supervision.
  • Supervisors should allocate supervisory resources to areas of higher ML/TF risk, on the basis that they understand the ML/TF risk in their country and have access to all relevant information determining a bank’s risk profile.

Financial Inclusion

Financial inclusion can contribute to greater transparency and traceability of financial flows. The proven low-risk exemption allows countries to exempt certain types of financial institutions or activities from some FATF Recommendations, provided there is a proven low risk of ML/TF.

Guidance for Supervisors

The FATF Guidance provides a general framework for applying the RBA by supervisors and the banking sector. Detailed guidelines on implementing the RBA by supervisors can be found in additional sources like:

  • The European Supervisory Authorities’ report
  • The Basel Committee on Banking Supervision’s guidelines

Overall, this guidance document emphasizes the importance of balancing financial inclusion with effective AML/CFT measures to prevent money laundering and terrorist financing.