Risk Treatment Strategies in AML/CFT and CPF Compliance
Risk Treatment Strategies in AML/CFT and CPF Compliance
Regulated Entities (REs) need to identify areas from which they are exposed to Money Laundering (ML), Financing of Terrorism (FT), and Proliferation Financing (PF) risks and develop their ML, FT, and PF risk mitigation strategies by relying upon various ‘Risk Treatment’ options. The current infographic explains various ML, FT, and PF Risk Treatment Strategies that Regulated Entities in the UAE can use to mitigate ML, FT and PF risks effectively.
Risk Acceptance
Risk Acceptance is a type of ML, FT, and PF risk treatment strategy where the regulated entity can decide, based on the principles of Risk Based Approach (RBA) and the RE’s ML, FT, and PF risk exposure while considering the RE’s Risk Appetite to decide which types of ML, FT, and PF risk it can accept. For instance, such Risk Acceptance can be documented and defined within the RE’s Customer Acceptance Policy, elaborating on the types of customers it would onboard based on various parameters defined for accepting customers posing different levels of ML, FT, and PF risks, such as low, medium, or high risks.
Risk Avoidance
Another manner of treating ML, FT, and PF risks is to avoid the particular risk factor entirely. Risk avoidance measures are an extreme form of cutting down on ML, FT, and PF risks.
Risk avoidance is sometimes pre-defined by AML laws and regulations, for example, not to conduct business with or suspend business relationships and transactions with Sanctioned individuals or entities whose names appear in relevant and applicable local and globally accepted international terrorist lists.
Risk avoidance measures are also termed as ‘de-risking’ measures. REs can have such customised de-risking parameters pre-defined within their internal AML, CFT, and CPF policies, Procedures, and Controls framework. For instance, ML, FT, and PF risk treatment strategies using risk avoidance can be documented in the Customer Handling and Customer Offboarding Policies of an RE.
Risk Reduction
One of the frequently used and recommended ML, FT, and PF Risk Treatment Strategies is risk reduction. Risk reduction can be achieved by conducting Customer Due Diligence (CDD) measures that help an RE to identify its customers and allocate appropriate risk ratings (such as high, medium, or low) through Conducting Customer Risk Assessment (CRA) and deploying adequate risk reduction or control measures such as Enhanced Due Diligence (EDD) measures that include obtaining additional information from the customer and obtaining senior management approval before onboarding such high-risk customers.
The risk reduction strategy works by reducing the impact of inherent risks of conducting business, leading to the residual risk coming within the risk appetite of the RE.
Risk Capitalisation
The concept of risk capitalisation is all about using the materialised or identified risks as an opportunity for the business to achieve or fulfil any of its requirements. Risk capitalisation requires using any unfavourable situation in a way that benefits the organisation.
In the case of AML compliance, unfavourable situations arise from materialisation or the occurrence of risky situations, usually through customers being sanctioned or their participation in illicit activities coming to light.
The capitalisation of already identified or materialised ML, FT, and PF risks can be done by ensuring prompt Regulatory Reporting by filing Suspicious Transaction Reports (STRs) with regulatory authorities and remaining compliant with legal obligations.
Conclusion
Regulated Entities must rely on various ML, FT, and PF Risk Treatment Strategies and implement them in combination to mitigate ML, FT, and PF risks effectively.
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