Risk Management for Banks: Calculation of Risk Score
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To calculate a risk score, banks need to consider both likelihood and impact of Money Laundering/Terrorism Financing (ML/TF) risks.
Understanding Likelihood and Impact Scales
Likelihood Scale
This scale determines how likely it is that an ML/TF risk will occur in our business.
- Very Likely: Almost certain; it will probably occur several times a year
- Likely: High probability it will happen once a year
- Unlikely: Unlikely, but not impossible
Impact Scale
This scale determines how serious the damage could be if an ML/TF risk occurs.
- Major: Huge consequences; major damage or effect. Serious terrorist act or large-scale money laundering.
- Moderate: Moderate level of money laundering or terrorism financing impact
- Minor: Minor or negligible consequences or effects
Risk Matrix and Risk Score
To calculate the risk score, we need to combine likelihood and impact.
| Likelihood | Impact |
|---|---|
| Very Likely | Major |
| Very Likely | Moderate |
| Very Likely | Minor |
| Likely | Major |
| Likely | Moderate |
| Likely | Minor |
| Unlikely | Major |
| Unlikely | Moderate |
| Unlikely | Minor |
Risk Score Table
| Risk Score | Description | Response |
|---|---|---|
| 4 (Extreme) | Risk almost sure to happen and/or have very serious consequences. | Do not allow transaction to occur or reduce risk to acceptable level. |
| 3 (High) | Risk likely to happen and/or have serious consequences. | Do not allow transaction until risk is reduced. |
| 2 (Medium) | Possible this could happen and/or have moderate consequences. | May go ahead but preferably reduce risk. |
| 1 (Low) | Unlikely to happen and/or have minor or negligible consequences. | Okay to go ahead. |
Risk Assessment and Management Exercise
Using the simplified risk management worksheet, banks can assess individual customer, product/service, delivery channel, and geographic region risks by blending likelihood and impact. They can also determine necessary actions against particular outcomes of risks.
By following this structured approach, banks can effectively manage ML/TF risks and ensure compliance with regulatory requirements.