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 AML 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 players' participation in cryptocurrency exchanges, online gaming, and online gambling in the market, regulations, audits, and penalties will inevitably increase in the following years.
Principle of Risk-based Approach
In addition to the importance of accepting the existence of risk, the principles of the risk-based approach also include the need for ongoing monitoring and assessment. A one-time risk assessment is not enough; companies need to continuously monitor and assess the risks associated with their customers and transactions. This is important because a customer's risk level or transaction may change over time.
Moreover, companies must ensure that their AML compliance policies and procedures are proportionate to the risks they face. For instance, the level of due diligence required for a low-risk customer may differ from that required for a high-risk customer. Similarly, the level of monitoring required for low-risk transactions may be different from that required for high-risk transactions.
Finally, it's worth noting that using AI-supported AML solutions is becoming increasingly common in the industry. These solutions can help companies to streamline their AML compliance processes, reduce the risk of human error, and identify suspicious transactions more effectively.
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?
The importance of a risk-based approach cannot be overstated. Each company has a different risk appetite, and their customers' risks are also not the same. Therefore, initiating the same AML control processes for each company and customer will not yield a healthy result. Additionally, institutions serving in the same sector in different countries have different risk appetites due to factors such as economic structures and AML laws. This is why 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 can minimize their risks more easily and effectively. Furthermore, applying a risk-based approach is not just a good practice but is also necessary as it is mentioned in the recommendations and regulations of local and global AML regulators.
The risk-based approach has not been applied, and some basic steps must have been taken to realize the principles. Some precautions for a risk-based approach are also specified in regulators' recommendations such as FATF. These measures are as follows;
- Know Your Customer and Customer Due Diligence: KYC procedures help companies verify their customers' identities and ensure that they are not involved in illicit activities. CDD procedures, on the other hand, involve collecting and analyzing customer information to assess their risk level. Proper KYC and CDD procedures are essential to accurately assess the level of risk associated with a customer, which is a fundamental aspect of a "risk-based" approach to AML management. By identifying and analyzing these risks, companies can take necessary actions to prevent money laundering and terrorist financing activities. It is worth noting that these procedures are not one-time events but ongoing processes that must be monitored and updated as necessary. Accurate customer due diligence is essential to ensure that the risk assessment is comprehensive and complete. Failing to perform adequate customer due diligence may lead to incomplete or inaccurate risk assessments, which can leave a company exposed to potential money laundering activities.
- AML Transaction Monitoring: The process detects and prevents money laundering activities. It involves applying appropriate risk ratings to clients and monitoring their transactions in real-time. To increase the effectiveness of monitoring or restricting measures, organizations must combine their risk characterizations for certain types of customers. Due to large organizations' high volume of transactions, manual monitoring is inefficient and time-consuming. Therefore, companies prefer to use AML Transaction Monitoring tools to automate the process. By utilizing a risk-based approach, these tools monitor customer transactions in real-time and can issue warnings in case of suspicious activities. This allows organizations to detect potential money laundering activities early on and take necessary action to prevent financial crimes.
- AML Compliance Officers: They play a crucial role in ensuring that their companies comply with AML regulations and implement effective AML controls. Their responsibilities include identifying potential money laundering threats, assessing the risks associated with the company's customers and transactions, and implementing appropriate AML policies and procedures. They also monitor the company's AML compliance program and report suspicious activity to relevant authorities. In addition to their primary responsibilities, AML Compliance Officers must stay current on AML regulations changes and adapt the company's AML program accordingly. They may also train employees on AML policies and procedures and conduct periodic AML risk assessments. The AML Compliance Officer acts as a liaison between the company and regulatory authorities, ensuring that the company is in compliance with local and global AML regulations. The role of the AML Compliance Officer is particularly important in implementing the risk-based approach, as they are responsible for assessing the company's risk appetite and implementing appropriate AML controls to mitigate those risks. They also play a key role in ensuring that the company effectively monitors transactions and reports suspicious activity to relevant authorities.
- Adverse Media Screening: It is an essential part of the risk-based approach and is used to identify potential risks posed by a customer's reputation. It involves screening customers against negative news and media sources, such as criminal records, regulatory enforcement actions, and negative news articles. Adverse media screening is an effective tool to detect potential money laundering activities, as it can reveal links to criminal organizations or PEPs who may pose a higher risk. Adverse media screening is particularly important for financial institutions, which are obligated to comply with regulations and guidelines for AML and CTF. The screening process can be automated, which helps to reduce the risk of human error and improve efficiency. AML compliance officers must ensure that the screening process is effective and up-to-date, as negative news about a customer can change whether a company will continue to work with them. In addition to screening customers, companies should also perform adverse media screening on their business partners, suppliers, and other stakeholders. This will help identify potential reputational risks and prevent any association with entities involved in criminal or unethical activities. Adverse media screening is integral to a comprehensive AML compliance program and should be regularly reviewed and updated to ensure its effectiveness.
Risk-Based Approach Examples
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.
Sanction Scanner 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 AML Transaction Monitoring solution.