Criminals constantly implement new methods and tools, making it more difficult for banks to identify financial crime. This means that banks must understand their specific risks and develop strategies to mitigate them. A risk-based approach (RBA) is key to managing such challenges effectively.
In this blog post, we will explain the four steps of a risk-based approach based on the Financial Action Task Force's (FATF) recommendations.
A risk-based approach is a strategy banks use to manage and mitigate the risks associated with money laundering and terrorist financing. Banks must identify and assess how criminals can use their services to conduct financial crimes. Then, they need to implement effective strategies to mitigate and report such risks.
The four steps of a risk-based approach are:
Risk identification involves recognising risks associated with money laundering and terrorist financing and how the bank can be used for such financial crimes.
Some of the factors banks need to take into consideration when identifying and assessing money laundering/terrorist financing risks include:
Risk assessment refers to evaluating the possibility and potential impact of the identified risks. This helps banks prioritise their resources and efforts on the most significant risks.
To conduct a thorough risk assessment, banks must consider several elements:
Risk mitigation involves developing and applying controls to reduce the likelihood and impact of identified risks. It can be split into three steps: customer due diligence, ongoing monitoring, and reporting.
Banks must perform thorough due diligence on customers to understand the nature of the business and relationship. The initial CDD steps that every bank must conduct imply the following:
Ongoing monitoring refers to evaluating transactions to ensure they align with the bank's understanding of the customer, the product's purpose, and the business relationship.
A transaction monitoring system is essential for detecting unusual or suspicious activities, especially when large volumes of transactions occur regularly. The system should analyse vast amounts of data in real time and flag any transactions that deviate from established patterns.
Some examples of monitoring practices include daily transaction monitoring and review, analysis of information, assessing the destination of funds, and establishing red flags.
The third step in mitigating risks is to report any identified suspicious activities. If a bank suspects that transactions or funds come from criminal activities or are connected to terrorist financing, it must report these suspicions to the appropriate Financial Intelligence Unit (FIU).
This last step is essential for banks to ensure that risk mitigation measures are effectively implemented and maintained. The following elements provide a framework for managing risks and ensuring compliance with regulatory requirements: