Let’s explore what happens when one minor error or a small crack in your AML compliance system makes your organization an epic center of money laundering disaster.
If such sort of incident occurs in any organization, in no time, the news of money laundering starts spreading like wildfire. You see the regulators are closing in, and the reputation you have worked so hard to establish is on the verge.
Doesn’t it seem alarming? It does. Because this isn’t an imaginative scenario, it happens in reality as well when organizations fail to implement effective risk management in their AML/CFT compliance efforts.
The tactics criminals are opting now nowadays to launder money and for terrorist financing are no less than the Hollywood thriller crime series. It seems like they are inspired by such a crime series.
That is why, mere ticking with the compliance checkboxes is not enough to combat such crimes. so what should businesses do in the fight against money laundering?
Organizations particularly financial institutions need to implement effective risk management as these measures could stand between the organization and the relentless forces of money launderers and terrorist financiers.
But what does effective risk management look like in practice? How can your compliance team not just manage but master the risks that come with AML/CFT obligations?
In this article, we’re diving deep into the strategies that will transform your risk management approach from reactive to proactive, from basic to bulletproof. No matter whether you are new to this war or already making your efforts in fight against the money laundering.
What must be included in a Comprehensive Risk Assessment?
The FATF 40 recommendation on AML CFT monitoring and screening obliges financial institutions to try to implement every compliance effort that could help combat such crimes.
But as we all know implementing every regulation isn’t possible for every organization. However, FATF sets the must standards for an organization that your organization must adhere to for an efficient and effective risk management framework.
- Risk Identification
The most important part of effective management is knowing where exactly the risk exists. So, it must start with identifying the risks within internal matters of your organization. For example, knowing who your employee is, is there any person who has a high-risk identity? For that businesses can implement the AML employee background checks.
And identifying the risk, businesses can achieve this through data analysis, and reviewing transaction histories of clients and employees as well. This practice helps the compliance team to understand customer risk profiles comprehensively.
- Risk Classification and Prioritization
The second phase in this process is risk classification and knowing which profile needs more priority and what sources must be allocated to what entity. As the compliance team highlights the high-risk individuals, the team can focus on the most critical area first.
- Continuous Monitoring
Financial institutions particularly the compliance team need to understand that compliance is not a one-time task. Businesses have to asses the risk regularly with proper AML/CFT ongoing AML monitoring system.
Why is it? because there are thousands of lists of sanctioned people that are regularly updated by international regulatory bodies. So to stay updated with the latest challenges and the sanctioned people list, businesses need to regularly monitor their clients’ transactions and activities.
- Implementing Risk-Based Approaches
There isn’t any single compliance effort that could fit in all business scenarios. So, as the business nature varies, the risk-based approach should also depend on the level of risk and the business nature. Let’s understand some of the risk-based approaches.
Risk-Based Customer Due Diligence (CDD): Financial institutions must make their customer due diligence processes based on the risk level that each client or customer can pose. For example, if there are high-risk customers, businesses need to implement enhanced due diligence on such entities. CDD must follow the AML/CFT Laws& Regulations for money Laundering such as thorough background checks and ongoing monitoring.
Transaction Monitoring: knowing where the people are making transactions and are these transactions unusual. Having a robust monitoring system can help implement compliance efforts to meet international regulatory efforts. For that, the organization can Set thresholds and alerts that align with the organization’s risk tolerance to ensure that high-risk transactions are flagged for further review.
Tailored Controls and Procedures: you need to first understand your unique requirements based on the nature of your business, then Develop controls and procedures that are specific to your organization’s risk profile. The procedures could include additional layers of approval for transactions involving high-risk jurisdictions or industries.
Stay Ahead of Financial Crime
You would not want your organization to come next in the money laundering headline. But for that, your organization must Implement proactive risk management strategies to safeguard against money laundering and terrorist financing.
