Risk-Based Approach, shortly known as RBA, is one of the most widely used statements in anti-money laundering (AML) and compliance. Every year millions of dollars are laundered through financial institutions. The source of money laundered in money laundering is severe crimes such as terrorist financing, corruption, bribery, drug trafficking, human trafficking, and arms trafficking. Therefore, financial institutions are at great risk against some crimes and have to take precautions.
An anti-money laundering compliance program for businesses is now mandatory for organizations at risk. Regulators gave organizations some mandatory obligations to effectively combat financial crimes. In addition, audits made by regulators to organizations have increased in recent years, and organizations that do not meet AML obligations have been given heavy fines and administrative fines. In 2019, 58 AML fines were issued by regulators worldwide, and the total amount of the penalty was $ 8.14 billion. The amount of penalties in 2019 is twice the amount and almost twice the value of fines imposed in 2018 when 29 fines of $ 4.27 billion were imposed. It demonstrates to us that organizations are now undergoing more detailed audits. With the participation of players such as cryptocurrency exchanges, online gaming, and online gambling in the market, regulations, audits, and penalties will inevitably increase in the following years.
Introduction to the Risk-Based Approach
In this article, we have already told you that companies with AML compliance requirements must have an AML program, should know the compliance meaning, and implement it. AML program, compliance program, or AML compliance program... Their naming can differ from organization to organization. But the common point in all of them is a "risk-based approach." Regulators operating in the field of AML, primarily FATF and the European Union, recommend and enforce a risk-based approach for institutions to effectively combat financial crimes. The simplest definition of the risk-based Approach is that the organization performs AML controls based on the organization's risk perception and the risk level of customers.
Application of Risk-Based Approach
The risk perception of each company and the risk level of each customer are different. Therefore, it will be inefficient for every firm to apply the same AML controls to every customer. Therefore, there are two basic steps for organizations to follow a risk-based approach. The first one is risk assessment. The second is the implementation of control processes suitable for risk levels. Risk assessment is generally carried out at the customer account opening. In addition, since customer risk levels may change over time, organizations should check their customers periodically after the account opening.
Performing Risk Assessment
Organizations apply customer due diligence and know their customer procedures to determine the level of customer risk. A sanction, PEP, and adverse media screening are some of the most used methods for determining customer risk levels. Sanction lists, PEP lists, and adverse media data are very important for organizations. These lists pose a great risk for organizations. Organizations should check these lists to ensure AML compliance and avoid sanction violations. The dynamic structure of these lists makes manual controls inefficient and time-consuming. Sanction Scanner tracks sanction, PEP, and adverse media data of more than two hundred countries in real-time and provides a scanning service. Organizations can check their customers on the web or API in seconds and avoid errors in compliance processes. It also ensures that organizations under KYC and CDD compliance fulfill their obligations.
Customer Risk Profile
After these checks, the risk profile of the customer is determined. The following information is generally determined in the customer risk profile.
- What are the industries that the customer works in and serves?
- What are the nationality of the customer and the countries that the customer serves?
- Does the customer match any sanction, PEP, or adverse media data?
- What is the customer's purpose for opening an account, and what kind of actions will the customer perform?
- What is the customer's trading volume?
- In which currencies will the customer perform in their transactions?
- What is the client's monthly average income?
Risk-Based Approach Example
For an AML program to be successful, all processes must be implemented correctly. Organizations that have performed the risk assessment correctly and have now determined the customer's risk level should apply an appropriate agile control process after this process. For example, the above information differs from customer to customer in each organization.
Let's say we have two customers in this example.
- Customer 1: He's a CEO. He has a monthly income of 50 thousand dollars.
- Customer 2: He's a hairdresser. He has a monthly income of 2 thousand dollars.
The monthly income and monthly expenses of a hairdresser with the CEO cannot be the same under normal conditions. In other words, while the 50 thousand dollar expenditure of the CEO every month is not a suspicious transaction, the 50 thousand dollar expenditure of the hairdresser in one month will be a suspicious transaction. Not every suspicious transaction is a financial crime. But they contain risk for financial crime. Therefore, it should be examined, and if necessary, it should be reported to the necessary reports with a "suspicious activity report."
Risk-Based Approach with Transaction Monitoring Tool
Considering that large organizations mediate thousands of transactions during the day, performing these controls manually in today's technology is a huge waste of time and is inefficient. Our AML Transaction Monitoring tool enables organizations to realize their AML obligations under the "risk-based approach" principle. Organizations can use ready-made rules and scenarios or use rules and scenarios specific to their own organizations. Thus, all financial transactions mediated by the organization are controlled in our transaction monitoring tool according to the rules and scenarios determined by the organization. All the scanned transactions are displayed at an alarming level from 1 to 5.
Our AML Transaction Monitoring tool provides solutions to strengthen AML compliance of businesses in every industry. With dynamic rules and scenarios, a sandbox test environment, real-time alarms, powerful alarm management, and many advanced features, you can make your AML control processes automatic and efficient. You can contact us for detailed information about our AML Transaction Monitoring tool.