As the world has become more connected and reliant on technology, criminals have become more sophisticated. Narcotics and arms traffickers as well as terrorists rely on money laundering to disguise the sources of their illegal funds. And they use a range of tools and methods to get around regulations and through loopholes in the financial system.
But governments around the world aren’t simply standing by and watching. Most modern nations have passed laws that make money laundering a crime. And they have given agencies and financial institutions the tools and latitude they need to mitigate risk.
Unfortunately, money launderers tend to be a rather creative bunch. Any time a government attempts to put up a roadblock in front of them, they inevitably find a way around it. So, we can’t eliminate all illicit activity. But with the right risk-based approach (RBA) to anti-money laundering (AML), we can minimize the amount of illegal funds that get into and remain in the hands of criminals.
What is a risk-based approach?
The Financial Action Task Force (FATF) is an intergovernmental organization founded by the G7 nations to combat money laundering around the world. In 2012, FATF published a series of recommendations for nations to take against money laundering within their borders. FATF based these recommendations on the idea of risk-based approaches to anti-money laundering.
Risk-based approaches to AML require banks and other financial institutions to carefully assess any potential risks they may face. This requires you to know your customer. It means that you’ll have to find out about prospective and actual clients’ business operations, industries, and characteristics. By getting to know your customer better, you can better assess how likely they would be to engage in money laundering and other illegal activities. This knowledge can then equip you to react to potential problems much more quickly and effectively.
Why is a risk-based approach to AML important?
Risk-based approaches to AML are important because they take a more proactive stance when it comes to illicit activity. Rather than waiting until illegal transactions and transfers have already taken place, an RBA allows you to implement stop gaps. These measures ensure nothing problematic has taken place or minimize the amount that’s already happened.
Financial institutions must adhere to governmental regulations to prevent money laundering. And risk-based approaches better enable them to protect themselves. Money-laundering fines can quickly add up. In 2014, for example, BNP Paribas was forced to pay $8.9 billion for failing to comply with AML regulations.
To protect yourself and your financial institution, you must know your customer well enough to implement effective risk-based approaches.
How do I conduct a risk-based approach to AML?
A risk-based approach to AML includes several different facets. In order to effectively implement it, you’ll need accurate risk assessments in place. This includes asking questions about:
- Geography: How vulnerable is this client to money laundering based on where their business is conducted?
- Vulnerabilities: Could this client be exposed to money laundering threats such as narcotics, arms, or sex traffickers?
- Infrastructure: Are there internal weaknesses where money laundering might flourish?
- Regulations: Does this client meet all regulatory obligations?
But to take an effective risk-based approach to AML, financial institutions also need to implement the following:
- Know Your Customer Guidelines. These require that a financial institution verify a client’s identity and business claims. Information gathered may include basic identification information like name, birth date, address, and identification number, as well as more detailed financial information such as occupation, location, expected pattern of transactions, and more. All of this information will help the financial institution paint a more detailed picture of any risk associated with the customer.
- Transaction Monitoring. Once a bank engages in a financial relationship with someone, risk assessment continues via transaction monitoring. Most automated systems look for a handful of key triggers, such as dramatic spikes in activity, unusual transaction locations, or transactions with sanctioned persons. If a financial institution deems a client’s activity as suspicious, they must file a Suspicious Activity Report (SAR), leaving a clear paper trail if something illicit does occur. Transaction monitoring is a key part of keeping up with changes in risk surrounding a customer.
- Advanced Solutions. If modern financial institutions are going to stay ahead of potential pitfalls, they’re going to need the latest advances in AML technology. Automated systems allow risk assessment to be done faster – and more successfully – than ever before.
Taking a risk-based approach to anti-money laundering isn’t a luxury. It’s a necessity. In today’s digital, always-connected world, there’s simply no better way to deal with traffickers, terrorists, and other criminals than cutting off their funding. And risk-based approaches to AML give financial institutions the ability to do this more easily than ever.