Fintech

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5 min read

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September 29, 2022

A Step-by-Step Guide on AML Risk Assessment

AML risk assessment is a process that analyses the risk of financial crime in any business. To know more about the importance & measure to reduce the risk, click here!

Introduction

Every company is accountable for preventing financial crime and laundering. Anti-money laundering (AML) risk assessment is crucial to any company's toolkit. They may assist organisations in determining the possibility that they would unintentionally support or participate in illegal behaviour.

AML compliance programs often begin with a thorough company risk analysis in light of applicable regulations. The RA considers many aspects of the company and makes value judgments based on those evaluations. 

It includes products, services, distribution channels, location, training, operations, suspicious activity monitoring, documentation, and reporting. It includes a plan for intermediaries or other parties involved in the financial transaction's value chain.

Anti-Money Laundering Risk Assessments

It conducts an AML risk assessment to determine how vulnerable a company is to the possibility of being used to commission a finance-related crime. The process aims to determine the company's vulnerabilities that might allow for laundering illicit funds or funding terrorist activities. One way it does this is by keeping an eye on and evaluating Key Risk Indicators (KRIs) or predetermined points of potential danger.

Reasons Why AML Risk Evaluations is a Must for Companies

As per Regulation 18 of the Terrorist Financing, Transfer of Funds (Information on the Payer) and Money Laundering, 2017 Regulations (MLR 2017), some companies must do AML risk assessments.

The assessment of risk can aid a company in doing things like:

  • Identifying and halting money laundering should be done by a risk assessment.
  • Know the dangers of engaging in a variety of economic transactions and partnerships.
  • Build systems of rules, processes, and checks that actively combat the possibility of financial crime.
  • Improve the quality of hiring and customer service choices.
  • Find deals and connections that involve a high-risk or blacklisted nation.
  • Analyse the efficacy of preventative interventions.

Recognising the Risks

Guidelines from the FATF demonstrate that there are universal dangers. No cookie-cutter method exists for calculating AML risk. Instead, it provides a framework for making decisions while cautioning that the list is not inclusive, with the possibility of additional hazards specific to the company's industry of entry.

The following are factors to think about:

Risks related to Products

There exist lasting risks related to ongoing requirements such as record-keeping, reporting, and monitoring and risks associated with anonymity. There are also concerns about handling large sums of cash or equivalent and risks associated with various products.

Risk related to Customer

It includes but is not limited to Know Your Customer duties such as PEP screening and sanctions, payment method, transaction size, geographic considerations, frequency, employment, etc.

Risk related to location

It locates in places worldwide that may provide a significant chance of criminal activities, terrorist funding, money laundering, or sanctions. The potential for a crime to occur anywhere in the United States is a risk. One must weigh it alongside the possibility of a crime occurring in the country.

Risk related to operations

Limits, record-keeping capabilities, transaction monitoring, senior management buy-in, personnel turnover, and adequate training for all employees and agents are all examples of operational processes and controls.

Subsequent Measures to Reduce Impact

Recommendation 19 of the Financial Action Task Force (FATF) lists nine general controls that may use to reduce risk. These include a wide range of activities, from determining if and when Enhance Due Diligence is needed, conducting that process, maintaining the necessary records, restricting or even outlawing particular operations, having a third party make a judgment, and so on.

To summarise, every high and occasionally medium risk should have a suitable countermeasure for ML/TF.

However, a company needs to exercise caution and make sure that one cannot classify all of its risks as medium or low. The regulator will see this aspect as a red flag indicating that the company may have missed properly analysing its AML program's risks.

There have been instances when authorities have demanded setting a higher standard, with all medium risks being treated as high risks and the implementation of suitable measures to mitigate the impact of this.

Overall Risk

After conducting a thorough RA, it will be possible to classify the company as low-, medium-, or high-risk. It consequently determines how much effort needs to be put into the AML regime to ensure a passing audit if it is effectively established and administered.

Developing a risk assessment

Even though each FATF G38 regulatory body presents its quirks, we should expect them to adhere to the broad strokes outlined above and in their recommendations.

Several organisations offer free toolkits, instructions, spreadsheets, and necessary material to conduct an accurate RA. Most are so basic and text-heavy that we would need an advanced RA course to develop a clear and structured RA rapidly.

A template can show the way.

The RA tool advances the process by outlining a framework and presenting examples of risks in each focus area mentioned above. 

It can eliminate the need for trial and error when creating something new. For instance, the presence of agents, the acceptability of cash payments, and the availability of virtual money, where transactions are often conducted anonymously, all rely on the company's nature. If a risk is missing, the RA tool allows for its addition.

The final deliverable is a Risk Assessment AML (RA) report that may form the foundation of an anti-money laundering (AML) compliance program. Customised brand reports, consultations with AML risk experts, and other premium add-ons are all available to assist at all stages of the AML life cycle.

Conduct Frequent Audits

It is important to note that the measures we just outlined are simply the beginning of a continual process of assessing AML risk. As a result, the next stage is performing frequent reviews and audits to ensure the programme runs smoothly and efficiently.

We should have a designated compliance officer examine updated policies and procedures to verify they continue to be in line with regulations. This aspect, together with a robust culture of compliance, may lessen the likelihood of money laundering inside our business.

Conclusion

AML risk assessment safeguards companies and society by fostering cultures where crime is accurate and dependable KYC processes enable less frequent and financial inclusion. Businesses might benefit from an AML risk assessment since it lessens the likelihood of becoming a conduit for laundered funds or those used to fund terrorism.

Incorporating these safeguards into an organisation's overall anti-money-laundering compliance policy is a crucial first step toward maintaining legal compliance.

FAQs

What is a risk analysis?
A risk analysis is a process businesses use to identify, assess, and monitor potential risks. A third party or an individual specialising in identifying and mitigating risks usually conducts this process.
Why do I need to do an AML Risk Analysis?
The Financial Action Task Force (FATF) requires all countries to perform an AML risk analysis for any business under their jurisdiction. It helps ensure financial institutions have the proper procedures to identify, assess, manage, and report suspicious transactions.
What should my AML risk analysis report include?
A good AML risk analysis report will include sections on each central area of vulnerability: Customer Due Diligence (CDD), Internal Controls for Monitoring Account Activities (ICM/AML), and Suspicious Activity Report (SAR).
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