Financial Crime World

Capital Market Service Providers Must Implement Risk-Based Approach to Combat Money Laundering and Financing of Terrorism

The Central Bank of Bahrain has emphasized the importance of implementing a risk-based approach (RBA) by capital market service providers (CMSPs) to combat money laundering (ML), financing of terrorism (TF), and other financial crimes (PF).

The Importance of Risk-Based Approach

According to the new regulations, CMSPs must design and implement RBA control measures that provide a common understanding of what ML/TF/PF threats they face. The RBA must recognize that ML/TF/PF risks vary across customers, geographies, products, services, transactions, and distribution channels.

Benefits of Risk-Based Approach

The RBA provides an assessment of the threats and vulnerabilities of CMSPs from being used as conduits for ML/TF/PF. By regularly assessing their ML/TF/PF risks, CMSPs can:

  • Protect and maintain the integrity of their business
  • Maintain the integrity of the financial system as a whole

Requirements for Implementing Risk-Based Approach

To implement RBA, CMSPs must have in place:

  • Policies to manage and mitigate identified risks
  • Controls and procedures to document risk assessments and findings
  • Mechanisms to provide risk assessment information to the Central Bank of Bahrain

Additionally, CMSPs must regularly assess their ML/TF/PF risks by considering all relevant risk factors, keeping assessments up-to-date, and having mechanisms to provide risk assessment information to the Central Bank of Bahrain.

Customer Risk Profiling

The regulations also emphasize the importance of customer risk profiling, which involves implementing policies and procedures to conduct risk assessments of customers during:

  • The establishment of business relationships
  • Throughout the course of those relationships

CMSPs must establish an appropriate set of risk factors that include:

  • Country risk
  • Customer risk
  • Products, services, and transactions risk
  • Delivery/distribution channel risk

Key Principles for Establishing Risk Factors

While there is no agreed-upon set of risk factors or single methodology to apply these risk factors in determining the ML/TF/PF risk of customers, CMSPs must:

  • Establish their own set of risk factors
  • Ensure that the measures taken are commensurate with the nature, scale, and complexities of their activities

Conclusion

The implementation of RBA by CMSPs is a critical step in combating ML/TF/PF and maintaining the integrity of the financial system. The Central Bank of Bahrain will closely monitor the compliance of CMSPs with these regulations to ensure that they are adequately addressing ML/TF/PF risks.