AML risk-rating models

AML risk-rating models

Effective AML risk assessments are an important factor in a financial institution’s ability to meet its regulatory obligations. Multiple-user platform facilitates enterprise-wide risk assessments across multiple lines of business, geographic locations, and other applicable criteria. A client risk assessment should identify and assess the risks posed by an individual client. While externally drawn up lists of high-risk countries may be useful, your firm may have access to wider intelligence that may cause you to upgrade the risk posed by a particular client, firm or geographic location. For example, you may have sector specific information you may be more aware of due to your firm’s main areas of business. Schedule 3ZA of the regulations sets out a list of high-risk third countries, which must be subject to a specific form of enhanced due diligence.

Financial institutions can conduct their checks on customers and transactions more efficiently and effectively, partly by using innovative technology such as machine learning, and by emphasising a risk-based approach. In addition to being more targeted, the more risk-based approach should also help to ensure that stringent controls do not unnecessarily impede customers’ access to banking services and the financial system. As a part of our duties as an AML supervisor, we have been reviewing the compliance of firms we supervise, including reviewing firm risk assessments, policies, controls and procedures and client files. Residual risks, on the other hand, are what is left after you have taken steps to mitigate the inherent risks. Another way to view residual risks is as the gaps in your controls where there is still a chance that money laundering or other financial crimes could occur. Your processes for carrying out the client and matter level risk assessment should be set out in your practice-wide risk assessment.

This information will determine the best way to monitor transactions, validate identities, and file suspicious activity reports. For each theme or sector, a multidisciplinary working group is set up consisting of experienced practitioners from government and, as appropriate, the private sector. Each working group assigns ratings to input variables related to their area of expertise, and justifies those ratings with quantitative and qualitative data. Each input variable has an assigned weight and impact on the vulnerability level of the assessed sector, area or product.

Ultimately the firm is responsible for its own compliance, and this responsibility can never be outsourced. The way in which you deliver your services can increase or reduce risk to the firm. Firms will know where their expertise is and what services they normally provide. In addition, initial client due diligence should include What Is AML Risk Assessment gathering some information on the expected ongoing client relationship and related activities. In some circumstances there may be valid reasons why clients cannot easily provide ID evidence (for example the elderly or refugees), but it is up to you to have processes in place to check that validity in such scenarios.

Clients might seek to onboarded with you for low-risk work, and then transition to higher risk work in order to bypass more stringent checks at the point of onboarding. The risk posed by your client also extends to the risk posed by the beneficial owner, if applicable. You need to be confident you know who your client is and why they are asking for your services, and any risk that you do not should be duly considered.

anti money laundering risk assessment

Not only can they help to protect the economy from the threat of financial crime, but they can also prevent financial and reputational damage to the organisations involved. A risk assessment is largely based on intuition and knowledge of how criminals exploit the private sector to launder money as well as proscribed business processes. It is therefore imperative, and a company’s responsibility, that the staff performing these assessments have the adequate training and tools to perform them. The companywide risk assessment will have highlighted the greatest areas of risk and in these cases thorough anti-money laundering checks should be performed as a matter of course.

A company-wide risk assessment is a floor to ceiling review of a business to identify what external risks of money laundering they face and where in their business is at risk of being exploited by criminals seeking to launder illicit funds. Once this is done it is used as the foundation for a company to design their risk assessment and anti-money laundering processes. There are two types of risk assessments required as part of a risk based approach. These are a companywide risk assessment and risk assessments of individual transactions. Through Memorandum Circular No. 37, Marcos made the directive and called on concerned agencies to support efforts in fighting money laundering and terrorism financing risk assessment.

anti money laundering risk assessment

The chief compliance officer will manage the training program and determine the qualifications the staff should have. Download our FREE Sanctions Screening Guide and learn how to set up an effective Sanctions Screening Process in your organization. Dr. Abdullahi U. Bello (FCCA, CFE, CAMS) is a fellow of the ACCA, a Certified Fraud Examiner (CFE) and a is a Fellow of Higher Education UK. He has over 20 years’ experience in banking, law enforcement, consulting and the academia. He also holds a BTech in Computer Science and a Postgraduate in Higher Education Practice.

  • Criminals started finding new ways to launder money as technology advanced in recent years.
  • This advisory package consists of a risk assessment tool and a systematic and organized process, with the broad participation of public and private sector stakeholders.
  • The guidelines emphasize the importance of the customer due diligence processes, reporting obligations and record keeping requirements as required under the PMLA.
  • You must never allow your client account to be used as a banking facility, or to pass funds through it without a legitimate underlying transaction.
  • Connecting the insights from transaction-monitoring models with customer risk-rating models can significantly improve the effectiveness of the latter.

The factors used to measure customer risk have evolved and multiplied in response to regulatory requirements and perceptions of customer risk but still are not comprehensive. Models often contain risk factors that fail to distinguish between high- and low-risk countries, for example. In addition, methodologies for assessing risk vary by line of business and model.

Anti-money laundering risk assessments form part of the required risk based approach. They should form part of, and tie into, a company’s overarching strategy to avoid facilitating the laundering of illicit funds. Regulations 28(12) and 28(13) of the MLR require firms to take steps to identify the money laundering and terrorist financing risks posed by a particular customer (or ‘client’) and matter. The list of possible model inputs is long, and many on the list are highly correlated and correspond to risk in varying degrees. Feature-selection algorithms that are assumption-free can review thousands of potential model inputs to help identify the most relevant features, while variable clustering can remove redundant model inputs. In addition, machine-learning approaches can build competitive benchmark models to test model accuracy, and, as mentioned above, they can help fix data-quality issues.

These are built on “input variables”, which represent factors related to money laundering/terrorist financing threats and vulnerabilities. ‘Threats’ here refer to the scale and characteristics of the proceeds of crime or financing of terrorism in the country. ‘Vulnerabilities’ here refer to weaknesses or gaps in a country’s defenses against money laundering and terrorist financing. Central to the Risk Assessment advisory package is a methodological tool, developed by the World Bank. It is an Excel-based model that enables countries to identify the main drivers of ML/TF risks.

In addition to the above, businesses ought to be cautious when dealing with customers that perform actions that are at odds with their profile. This might happen if a customer suddenly attempts to enter into a high-value transaction, pay via a previously unrelated entity, or engage in a transaction that makes no commercial sense. Businesses should carefully consider whether their compliance framework does enough to identify and address these risks.

You can use the SRA client and matter risk template as a base to develop a risk assessment tailored to your firm. See section 2.3 of the guidance for the legal sector for a full list of factors your risk assessment should consider. How to use a risk-based approach to carry out compulsory risk assessments of your business. The latest AML Guides FATF should be observed when doing financial activities with companies and individuals from industries with higher risks of money laundering and financial activities. In addition, NRA provides a reliable Risk Assessment and risk levels based on different Key Risk Indicators.