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Geographic Risk Assessment Urgently Needs Upgrade

A comprehensive review of Iceland’s geographic risk assessment has identified significant gaps and shortcomings, highlighting the need for a more detailed and robust approach to identifying high-risk jurisdictions.

Current Limitations

Currently, the assessment is informed by a list of high-risk and uncooperative jurisdictions from the Financial Action Task Force (FATF) and the European Commission. While this provides some guidance, it is insufficient to provide a comprehensive understanding of money laundering and terrorist financing risks across countries.

Proposed Solution

To address these shortcomings, authorities should leverage available information on cross-border transactions data and intelligence gathered by other competent authorities to develop an internal list of high-risk countries. This would enable a more nuanced assessment of country-level ML/TF risks, allowing for targeted supervisory engagement and risk-based supervision.

Data Analysis Toolkit Upgrade

Iceland’s financial sector could also benefit from investing in a more advanced data analysis toolkit, including machine learning algorithms and data mining techniques. This would enable the authorities to process larger volumes of data, including payments and deposits information, to inform ML/TF risk assessments more effectively.

Enhanced Supervisory Returns

Furthermore, the supervisory returns provided by banks and virtual asset service providers (VASPs) should be enhanced to include more granular information on transactions, beneficial ownership, and customer risk. This would enable a more detailed analysis of geographic risks and facilitate targeted supervision.

AML/CFT Risk-Based Supervision

While significant progress has been made in enhancing AML/CTF risk-based supervision, the authorities should consider further enhancements to drive meaningful change in AML/CTF compliance levels and control effectiveness.

Proposed Enhancements

A greater focus on thematic inspections, increased supervisory presence through more frequent onsite inspections, and a detailed minimum engagement model would help to identify critical areas for review. The authorities should also reassess resource adequacy regularly and provide guidance on resourcing needs.

VASP Sector Risks

Iceland’s small VASP sector is currently exposed to limited ML/TF risks, but the recent expansion in scale of activity poses a potential threat. The authorities have identified weaknesses in the application of preventive measures, including business risk assessment, customer due diligence, and transaction monitoring.

Proposed Revisions

To address these deficiencies, the authorities should consider revising the sectoral risk rating of VASPs upward and implementing targeted supervisory engagement to ensure compliance with AML/CTF requirements.