The Risk-Based Approach was first proposed by the British regulator, the Financial Conduct Authority (FCA), in 2000. With this recommendation, the Financial Action Task Force (FATF) first applied the risk-based approach in 2007, with FATF, international organizations such as FATF member countries, Wolsfberg Group, and International Organization of Securities Commissions adopted the risk-based approach principle. Since then, the "risk-based approach" has undoubtedly become one of the most widely used expressions in the field of anti-money laundering (AML). In addition, it is an indispensable tool for effective AML management.
So what is a risk-based approach? In its simplest definition, the risk-based approach is the realization of control in AML management according to the risk perception, appetite of the organizations, and the customers' risk level.
The Importance of Risk-Based Approach
Each company's risk appetite or its customers' risk cannot be the same, so initiating the same AML control processes for each company and each customer will not give a healthy result. In addition, the risk appetite of even institutions serving in the same sector in different countries is not the same because the economic structures of countries and factors such as AML laws are not the same. Therefore, a risk-based approach is needed; with this approach, countries, and companies can create an AML Control program that is most suitable for them and minimize their risks more easily and effectively. In addition, the necessity of applying a risk-based approach is mentioned in the recommendations and regulations of local and global AML regulators.
Principles of Risk-Based Approach
When looking at the principles of the risk-based approach, the first thing that matters is the acceptance of the existence of the risk. A risk assessment should be made according to this risk, and finally, this risk assessment should be examined, and a compliance process should be applied accordingly.
According to the principles of a risk-based approach, the same Know Your Customer procedures should not be applied to a customer with high risk and a customer with a normal risk level. For example, Customer Due Diligence procedures for Political Exposed People (PEP), which are known to be high-risk, are not sufficient. Enhanced Due Diligence procedures may be required for this. Companies must continuously analyze, monitor, and interpret their data within the scope of AML compliance. Implementing these compliance policies may sound difficult, but AI-supported AML solutions have been developed to facilitate AML compatibility.
Main Elements of Risk-Based Approach
The risk-based approach has not been applied and some basic steps must have been taken for the principles to be realized. Some precautions for a risk-based approach are also specified in the recommendations of regulators such as FATF. These measures are as follows;
Know Your Customer/Customer Due Diligence
Know Your Customer and Customer Due Diligence procedures are performed to know who the customers really are and to verify their work and identity. These procedures are the most fundamental building blocks of effective AML compliance management. Within the scope of these procedures, risks can be determined in the first relationship with the customer and afterward, and necessary actions are taken according to these risks. Accurately assessing the risk level of customers' money laundering is an important prerequisite for a "risk-based" approach. Analyzing risks may be incomplete if accurate customer due diligence has not been done.
AML Transaction Monitoring
The client's money laundering risk rating should be applied appropriately. Within the scope of these applications, monitoring or restricting real-time transactions takes an important place. With regard to certain types of customers, organizations must combine their risk characterizations to increase monitoring or restriction measures in their business operating systems. Considering that large organizations mediate thousands of transactions per day, performing these controls manually in today's technology is a huge waste of time and inefficient. For this reason, companies prefer to use the AML Transaction Monitoring tool. In line with the risk-based approach within the scope of Transaction Monitoring and AML compatibility, customer transactions are monitored instantly, and the system can give a warning in case of doubt.
AML Compliance Officer
The role of AML Compliance officers in companies is very important. They identify money laundering threats and have the authority to report suspicious cases to the authorities. One of the key points in the implementation of the risk-based approach is the AML compliance officer.
Adverse Media Screening
Customers should be browsed in lists such as Sanctions, PEP, Adverse Media, Watchlist. Any negative news about a customer can change whether companies will work with that person, and detecting this news plays an important role in protecting yourself against risk. As a result, adverse media screening of customers is part of the risk-based approach.
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