Risk & Assurance

Risk Assessment for the Identification of Money Laundering Risks

Risk Assessment

Money laundering can be defined as the process of illegal concealment of the origin of money obtained from illicit activities through the conversion of the same into a legitimate source.

It is a crime in most jurisdictions with varying definitions. It is usually a key operation of organized crime. The identification, assessment and thorough understanding of Money Laundering /Terrorist Financing risks is an important part of the implementation and development of a national anti-money laundering / countering the financing of terrorism (AML/CFT) regime, inclusive of the laws, regulations, enforcement and other measures for the mitigation of Money Laundering /Terrorist Financing risks.

It assists the authorities in the prioritisation and efficient allocation of resources. The final results of a national risk assessment, whatever its scope, can also provide important information to financial institutions (FI)  and designated non-financial businesses and professions (DNFBPs) for support in carrying out their own risk assessments. Upon the proper understanding of Money Laundering /Terrorist Financing risks, country authorities may apply AML/CFT measures in a manner that ensures they are commensurate with such risks – i.e., the risk-based approach (RBA) – which is central to the FATF (Financial Action Task Force) standards as is set out in FATF Recommendations.

Carrying out Money Laundering and Terrorist Financing risk assessment is an extremely subjective matter, and there is no thumb rule to be followed for the same. There is no uniformity in the procedures of risk assessment. However, they may be guided by a set of broad principles. The present article shall focus on Risk Assessment for the Identification of Money Laundering risks and discuss the key aspects related to the same such as its meaning, importance, key factors and the process followed therein. 

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Risk Assessment: Concept and Origin

Risk assessment refers to the identification of the risks associated with any business on the basis of their likelihood and impact. AML risk assessment is a calculation of the possibilities of a money laundering event taking place.

The concept of Money Laundering (ML) and Terrorist Financing (TF) risk assessment arises from the recommendations of the Financial Action Task Force (FATF)[1].

Such assessment allows countries for the identification, assessment and understanding of their money laundering and terrorist financing risks. Upon the proper understanding of these risks, countries can apply AML/CFT measures corresponding to the level of risk, in other words: the risk-based approach (RBA).

Risk Assessment for the Identification of Money Laundering Risks: Benefits for Businesses

Such risk assessment can benefit the business in the following ways

  • Helps in the adoption of the risk-based approach for the identification and prevention of money laundering
  • Gives a better understanding of the risks associated with various business relationships and commercial activities.
  • Enables the creation of policies, procedures, and controls, which facilitates the reduction of the risk of financial crime.
  • It helps businesses in making informed decisions about employees and clients.
  • Enables the identification of transactions and relationships involving an at-risk or sanctioned country.
  •  Facilitates the evaluation of risk reduction measures.

Ultimately, such an assessment helps businesses in the reduction of the risk of money laundering and terrorist financing. These measures are an important part of any anti-money laundering (AML) compliance program and allow organisations to stay on the right side of the law.

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Factors to be Considered for the Risk Assessment

For the identification and assessment of  the money laundering risk to which organizations are exposed, the following factors must be considered which should include the following:

  • The nature, scale, diversity and complexity of their business
  • An organization’s target markets
  • The no. of customers already identified as high risk
  • The jurisdictions of the organization
  • Either through its own activities
  • or the activities of customers, especially in jurisdictions with relatively higher levels of corruption or organised crime,
  • or deficient country-level anti-money laundering measures
  • The distribution channels, the extent of dealing directly with the customer or the extent to which it relies on third parties to perform AML measures.
  • The internal audit and regulatory findings
  • The volume of business activities like transactions, considering the usual activity of the organization and the profile of its customers.

Procedure for Risk Assessment for the Identification of Money Laundering Risks

The process of risk assessment can be broadly divided into 3 stages, i.e. Identification, Analysis and Evaluation, which are discussed below –

Identification

 Generally, the process of identification in the context of an ML/TF risk assessment commences with the development of an initial list of potential risks or risk factors faced by the countries while combating ML/TF.

These will be drawn from known or suspected threats or vulnerabilities. Ideally, at this stage, the identification process should be comprehensive; however, it should also be dynamic in the sense that new or previously undetected risks identified might also be considered at any stage in the process.

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Analysis

Analysis lies at the heart of the ML/TF risk assessment process. It involves consideration of the nature, sources, likelihood and consequences of the identified risks or risk factors. Ultimately, the aim of this stage is to gain a holistic understanding of each of the risks – as a combination of threat, vulnerability and its result for work working toward assigning some sort of relative value or importance to them.

 Risk analysis can be undertaken with different degrees of detail, depending upon the type of risk and the purpose of the risk assessment, and based on the information, data and resources available.

Evaluation

Evaluation with regard to the ML/TF risk assessment process involves taking risks analysed during the previous stage for the determination of priorities for addressing them, considering the purpose established at the beginning of the assessment process. These priorities can contribute to the development of a strategy for their mitigation.

Conclusion

Such processes are designed for the prevention of illegal money transactions which conceal the source of funds earned from or funded for criminal activity. One of the most suitable ways for improving the company’s security against these transactions is the development of a thorough risk assessment procedure.

Ignorance isn’t a defence when it comes to government-imposed money laundering and AML penalties. The organization will suffer financial harm and reputational damage in the event of the non-implementation of the risk assessment measures to lower your risk exposure. Such an assessment plan will help in the prevention of financial crimes.

Read our Article: Risk Based Approach and assessment under IFSCA AML/CFT Guidelines 2022

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