The risk based approach to AML - Anti-Money Laundering Compliance

The risk based approach to AML - Anti-Money Laundering Compliance

The risk-based approach is basically the realization of control in Anti- money Laundering management according to the risk appetite of the business enterprises, risk perception, and the risk level of the customers. Every business has its own risk-bearing capacity, and in Anti-money Laundering compliance, it becomes essential to adopt a risk-based approach in order to take calculated moves.

This article is going to talk about the importance of a risk-based approach in AML compliance. So without wasting much of your time, let us begin.

Principles of The Risk Based Approach to AML Compliance

Acceptance of the existence of risk is the first thing that actually matters when it comes to the principles of the Risk Based Approach to AML. A risk assessment should be carried out according to the intensity of risk, and the risk assessment process should be examined, and the compliance process should be applied.

According to the principles of a risk-based approach, the same process of Know Your Customer (KYC) should not be applied to customers who carry
either a high-risk profile or a medium-risk profile. Hence, it is viable only for customers with negligible or low-risk quotient.

For instance, the Customer Due Diligence (CDD) Process for Politically Exposed People (PEPs), which undoubtedly belongs to a high-risk profile, is insufficient. Therefore, the help of Enhanced Due Diligence or EDD procedures might be required for this.

In addition, business enterprises must continuously monitor, analyze, and interpret their pool of data that falls within the scope of anti-money laundering compliance.

Practically implementing all these compliance policies might seem complicated, but with the help of artificial intelligence-supported anti-money laundering software solutions, the facilitation of AML compatibility is possible.

Importance of Risk-Based Approach in Anti-Money Laundering Compliance

As already touched on earlier, the risk appetite and risk-bearing powers differ from one company to another. Therefore, following the same anti- money laundering process for each enterprise or an individual won't fetch healthy results.

Besides that, the risk-bearing appetite of the companies from the same industry also differs because the anti-money laundering laws and economic structure of the countries are not the same.

Here is when the need and importance of a risk-based approach come into the picture. With the help of a risk-based approach, companies from various countries can create an anti-money laundering program that is universally suitable and effectively minimizes their risk.

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Primary Elements of a Risk-Based Approach in AML Compliance

1- Anti-money Laundering Transaction Monitoring

The money laundering risk rating of the customers should be applied appropriately. Monitoring and restricting transactions are considered essential within the scope of application of money laundering risk rating techniques.
Various types of customers and business enterprises must combine their risk characterization in order to increase the efficiency of monitoring along with restriction measures within their business operating systems.

Considering the big business enterprises mediate multiple transactions in a single day, performing all these controls manually will waste a lot of your time and efforts.
Because of its inefficiencies with manual processing, many businesses prefer to leverage the power of anti-money laundering transaction monitoring tools. Customer transactions are being instantly monitored, and a direct intimation has been sent in case of any doubt.

2- Know Your Customer or Customer Due Diligence (CDD)

Knowing your customer and the customer due diligence process are carried out in order to identify who your customers really are and also to verify their identity and work.

These procedures are one of the most fundamental building blocks of efficient and effective anti-money laundering compliance management.

Within the scope of these procedures, you can determine your first relationship with the customer and afterward take necessary actions in order to mitigate those probable risks.

Assessing the risk level of your customers accurately is an undeniable prerequisite for the risk-based approach. However, without accurate customer due diligence, thoroughly analyzing risk is going to be a challenge.

Compliance. Trust. Transparancy

Customized and cost-effective AML compliance services to support your business always

3- AML Compliance Officer

The primary role of an anti-money laundering compliance officer in business enterprises is very important.

An AML compliance officer identifies threats related to anti-money
laundering threats and also has the authority to report suspicious cases to the concerned authorities.

Thus, an AML compliance officer is an integral part of the implementation of the risk-based approach.

4- Adverse Media Screening

Any negative news about an individual customer or a business enterprise can broadly impact the decision to work together.

Plus, keeping an eye on such news is the best way to protect your organization from any potential risks that might come into the picture upon dealing with clients with high-risk profiles.
Adverse-Media-Screening

How Does the Risk-Based Approach Work in AML?

An anti-money laundering program incorporates a number of essential measures which are designed to identify individual customers and companies accurately and the business enterprises in which they are involved. In addition to that, a financial institution (FI) must include the following.

Final words

With this, we now understand what social and economic impact money laundering has on the economy of the country and how to overcome or reduce the adverse effects of the same on the economy. For this,AML UAE can help, as an expert, in better implementation of AML/CFT policies in one's organization and contribute towards minimizing the negative socio-economic impact of money laundering activities.

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FAQs - Importance of a Risk-based Approach

Here are a few frequently asked questions when it comes to establishing the importance of a risk-based approach in AML compliance.

A risk-based approach to AML is adopting the AML risk mitigation measures aligned with the risk envisaged by the Company. It helps in the effective utilization of resources, ensuring better controls are implemented for higher-risk aspects while standard controls are in place of normal risk scenarios. This methodology helps the company fight the money laundering and terrorism financing risk most effectively and manage the risk within its risk appetite.

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About the Author

Pathik Shah

CISA, FCA, CS, DISA (ICAI), FAFP (ICAI)

Pathik is a multi-disciplinary professional with more than 22 years of experience in compliance, risk management, accounting, system audits, IT consultancy, and digital marketing. He has extensive knowledge of Anti-Money Laundering rules and regulations, and he helps companies comply with legal requirements. Pathik also helps companies generate value from their IT investments.