AML-CFT Risk Assessment Process

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AML-CFT Risk Assessment, AML-CFT compliance, AML-CFT training, compliance program, due diligence, KYC, KYE

AML-CFT Risk Assessment Process With the Help of Risk Insight Experts

A risk-based approach requires companies to have systems and controls that are commensurate with the specific risks of money laundering and terrorist financing facing them. AML-CFT risk assessment is, therefore, one of the key steps in creating a sound AML-CFT compliance program.

As money laundering risks increase, stronger controls are necessary. However, companies must establish and apply controls, including customer due diligence (CDD) and monitoring of suspicious transactions, to mitigate risks which may have a different level of criticality.

AML-CFT risk categories can be broken down into the following levels:

  • Prohibited: The company will not do any business given the risk, for example with a company or individual listed on the OFAC list or an organization identified as terrorist by the UNO.
  • High-Risk: The risks are high but can be mitigated. In this case, companies should conduct enhanced due diligence (EDD) on the customer and/or supplier to reduce the risks.
  • Medium Risk: Medium risks merit additional evaluation, but not as much as high risks.
  • Low Risk: This represents the baseline AML-CFT risk. Typically, low risk indicates normal, expected activity.

For all this, a risk-based approach can help companies focus and spend more resources on managing medium and high risks. A risk-based approach is more flexible and effective.

Risks can be of different nature. In order to better assess the overall risk level of the business, it is advised to use three categories of risk factors: customer; country and geographic; and product, service or distribution channel.

An AML-CFT risk assessment will have to look at different factors, including the geographical regions involved, customer types and the products and services offered.

Customer Risk Factors

Customers are basically all companies and individuals who want to establish a relationship with a company. It is key to understand whether the customer is involved in criminal activities; is a PEP (Politically Exposed Person) who may be involved in corruption; is an anonymous offshore company established in a non-cooperative tax haven.

Supervisory authorities in various countries have stated that some types of customers are high-risk for money laundering. They include for example real estate brokerage companies; jewel, gem and precious metals dealers; cash-intensive businesses; and casinos. Many other industries that could be considered to be high-risk and many other need to be considered.

Implementing a strong customer due diligence (CDD) process when establishing a customer relationship is a key component to identifying high-risk customer types.

Geographic Risk Factors

One of the key factors to evaluate in developing a risk-scoring model is jurisdictional risk. It is crucial to evaluate the country of incorporation of a company or the country citizenship and residence of a customer. Moreover, it is important to assess the countries with which a customer conduct his business.

Companies should also consider the overall reputation of the countries in question. Some may be governed by dictators who steal the nation’s resources, while others may be the haven for money launderers or terrorists or may be place for production and/or distribution of illicit drug.

Product / Services / Distribution Channel Risk Factors

An important element of AML-CFT risk assessment is to review the distribution channels used by the company or analyze all products and services offered to determine how they may be used by criminals to launder money.

For example, a precious metal dealer should assess the vulnerability of the metal markets he deals with and see what are the typologies of laundering money in that industry. Would a supplier from Colombia be selling gold of Venezuela which is under embargo? Is that gold been used as a means of payment by drug dealers?

Real estate brokers too have to assess all the risk typologies and see if the transactions they carry on may be a vehicle for money laundering.

Any company needing advice on the complexities of running an AML-CFT risk assessment should seek the external assistance of Risk Insight experts.

Risk Insight experts can help your company run an AML-CFT risk assessment of your organization. This will help you develop a risk-based AML-CFT compliance program which will shield you and your company from legal, financial, organization and reputation risks.