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AML Compliance - The Benefits of a Risk-Based Approach

When properly implemented, the risk-based approach allows for a balanced integration of human judgment and modern technology in the AML compliance process.


Financial institutions are facing a broadening range of money laundering threats, and modern financial criminals have a variety of tools at their disposal to bypass preventative measures put in place to stop them.

As a result, financial institutions must be able to respond to threats effectively in order to balance reliability and cost needs with compliance obligations.

The most effective way to achieve that goal is to use a risk-based approach, which means developing an AML compliance program that is tailored to the unique levels of risk exposure that each customer presents.

What is AML compliance?

AML (anti-money laundering) compliance is a set of laws, regulations, and procedures that businesses must follow in order to protect themselves and their customers against money laundering and other financial crimes.

The main goal of AML compliance is to identify, report, and prevent money laundering activities. A risk-based approach is key to achieving effective AML compliance as it allows businesses to focus their resources on areas of highest risk.

This helps ensure that a business meets its legal and regulatory requirements while minimizing costs.

Why is a risk-based approach important?

A risk-based approach to AML compliance involves assessing the risk of potential money laundering activities and taking appropriate steps to identify, prevent, and mitigate that risk. This could include activities such as customer due diligence (CDD) checks, transaction monitoring, and analyzing customer data.

Risk-based approaches should be tailored to the particular risk profile of an institution, its products, services, customers, and geographic location.

FATF issued a series of recommendations to countries in 2012 on how to combat money laundering within their borders. The FATF's recommendations are based on the concept of risk-based approaches to anti-money laundering.

Prior to the introduction of risk-based approaches to AML, banks and financial institutions like fintechs and neobanks would manage their compliance obligations through a simple approach, that involved merely fulfilling a standardized list of AML requirements for each customer. While that standardized approach was prevalent in the 1990s, the UK's Financial Services Authority (FSA) proposed a "risk-based" approach for the first time in its 2000 publication, A New Regulator for the New Millennium.

The Financial Action Task Force first implemented risk-based AML in 2007, and it was further structured in its 2012 update to the International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation - also known as the "40 Recommendations."

What are the principles of a risk-based approach to AML compliance?

A risk-based approach to AML changes the focus of AML compliance away from data analysis and toward proactive assessment. Financial institutions need to work continuously to understand the money laundering threats they face and implement appropriate risk management measures.

In practice, this means that customers can be classified based on their risk exposure, with 'higher risk' customers subject to increased AML scrutiny. In general, the risk-based approach to AML enables financial institutions to:

  • Identify the existence of risk.
  • Conduct risk assessments.
  • Create and implement risk-management strategies.

When properly implemented, the risk-based approach allows for a balanced integration of human judgment and modern technology in the AML compliance process.

An accurate risk assessment is essential to the risk-based approach to AML compliance. Financial institutions' compliance efforts are guided by two distinct categories of risk.

The first is the concept of "geographical risk," which refers to a country's vulnerability to money laundering threats at the national level. The second concept is the concept of “individual risk," which refers to the specific risks that financial institutions face from their customers and how their internal AML process manages those risks.

Components of an effective risk-based AML compliance program

Financial institutions should implement a risk-based AML program that includes a number of important measures designed to accurately identify individual customers, as well as the businesses in which they are involved, in order to comply with the FATF recommendations.

More specifically, financial institutions need to:

  1. Create and implement proper KYC and CDD procedures: Creating and implementing proper "Know Your Customer (KYC)” and “Customer Due Diligence (CDD)” procedures is essential for any successful AML compliance program. KYC procedures are used to verify a customer's identity, address, and other relevant information. This helps businesses determine a customer's risk profile and identify potential money laundering activities.

    Similarly, CDD procedures involve performing additional checks on customers to assess their financial activities and determine whether their transactions pose a high risk for money laundering. Adhering to KYC and CDD protocols reduces the risk of money laundering and keeps businesses compliant with AML regulations.

  2. Implement transaction monitoring: Transaction monitoring is an important element of an effective AML compliance program. This process involves the use of advanced software to monitor customer transactions and detect suspicious activity. Once identified, these suspicious transactions can then be reported to the relevant authorities and prevented from occurring. Implementing a transaction monitoring system requires that businesses have adequate resources, as well as a solid understanding of the technology and processes involved.

  3. Screen new and existing customers against sanctions lists: Screening new and existing customers against sanctions lists is another important aspect of an effective AML compliance program. Sanctions lists refer to lists of individuals, businesses, or countries whose activity could present a risk for money laundering. Businesses should always ensure that they are screening their customers against these lists in order to identify any suspicious activity. This process generally involves identifying customer details through KYC/CDD procedures and then cross-referencing them against the relevant sanctions lists. It is also important to regularly update these lists to ensure that the most up-to-date information is being used.

  4. Screen against PEP lists: Screening against PEP (Politically Exposed Person) lists is another important step for AML compliance. These lists refer to individuals who have been identified as being at a high risk of money laundering due to their occupation or political position.

  5. Screen for Adverse Media: Screening for Adverse Media is a key step for an effective AML compliance program. This involves conducting checks on customers to ensure that they do not have any associations with negative press or publicity. This helps businesses identify high-risk customers who may present a greater risk of money laundering or other illegal activities. Screening for adverse media typically involves searching various public and private databases for any information on the customer in question.

  6. Schedule AML training for employees: While every employee in a financial institution should be familiar with the AML process, specific employees will be held more accountable for the program's implementation. A company might very well find it appropriate to implement a base level of training for all employees and then add additional, targeted training for those with more AML-specific responsibilities. As a result, an AML compliance program should ensure that those employees receive regular training and understand how to perform their assigned duties in the same way that audit and testing schedules are created.

In conclusion

Taking a risk-based approach to anti-money laundering isn’t a luxury. It’s a necessity. There is simply no better way to deal with traffickers, terrorists, and other criminals in today's digital, always-connected world than to cut off their financing.

And risk-based approaches to AML make it easier than ever for financial institutions to do so.

Schedule a free demo today to see how Flagright's centralized, no-code platform for AML compliance and fraud prevention can help you meet your AML compliance needs and go live in just 4 days.

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