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Suspicious Transaction Filings and Risk-Based Supervision: A Global Watchdog’s Guide

In an effort to combat money laundering and terrorist financing, financial regulators worldwide are implementing risk-based supervision strategies. This approach involves monitoring entities for suspicious transactions and applying targeted measures to mitigate risks.

According to the Financial Action Task Force (FATF), supervisors must take into account the ML/TF risks within their sector(s) when developing a risk-based supervisory framework. This includes identifying, assessing, and understanding risks at both the sectoral and entity level.

Risk-Based Supervision: A Key Component

Risk-based supervision is a critical component of effective anti-money laundering (AML) and combating the financing of terrorism (CFT) efforts. It involves implementing a sound risk assessment system that enables the identification, measurement, control, and monitoring of ML/TF risks.

To achieve this, supervisors must:

• Develop a good understanding of ML/TF risks at both sectoral and entity levels based on sound risk assessments and informed by national ML/TF risk assessments.
• Implement a supervisory strategy that effectively directs supervisor resources to address high-risk entities and transactions.

Key Indicators of an Effective Risk-Based Supervisory Framework

In addition to these key components, an effective risk-based supervisory framework should also include the following characteristics:

• A comprehensive national risk assessment (NRA) that identifies ML/TF risks across all sectors.
• Meaningful national cooperation between relevant authorities, including FIUs, LEAs, and prudential supervisors.
• A correlation between sectoral risk and resources available to the supervisor responsible for that sector.

Real-World Examples

Several countries have implemented effective risk-based supervisory frameworks, including:

• Single AML/CFT supervisors responsible for overseeing all regulated entities.
• Integrated supervision models that combine AML/CFT and prudential supervision.
• Decentralized models with multiple agencies responsible for AML/CFT supervision across different sectors.

These models can have varying benefits and challenges, including differences in resource allocation, expertise, and cost efficiencies. However, a comprehensive NRA and national cooperation are critical to ensuring effective risk-based supervision.

Conclusion

Risk-based supervision is a crucial component of global efforts to combat money laundering and terrorist financing. By understanding ML/TF risks at both sectoral and entity levels, supervisors can apply targeted measures to mitigate risks and prevent financial crimes.