Money laundering and financial criminals pose an ongoing, ever-evolving threat to financial institutions, with the potential for serious scandals, hefty fines, reputational losses, and other severe business disruptions. Obligations to regulations such as the 6th EU Money Laundering Directive or the UK’s Money Laundering Regulations are consistently updated to answer new criminal tactics and ensure effective anti-money laundering (AML) oversight. Therefore, implementing a proactive AML system that uses a risk-based approach allows organisations to counter criminal threats according to the level of risk a vendor or client presents.
Endorsed by the Financial Action Task Force (FATF), whose member states include the UK and the European Commission, in 2012, risk-based AML strategies are the international standard. Instead of applying one static list of AML and due diligence checks to all vendors or clients, a risk-based approach takes a more individual view. Clients and vendors should be assigned risk levels during initial AML assessments within the onboarding process, continuously monitored for changes in their vulnerabilities and managed accordingly. Higher risk clients and vendors can then be examined more deeply and frequently to ensure compliance and prevent crimes, while those with lower risk levels can be consistently but less intensely observed. This allows organisations make effective use of their resources, pinpointing potential sources of threats to take proactive preventative actions.
Key to this process is an accurate risk assessment process, informed by geographic factors, potential administrative gaps, and cyber and compliance statuses, as well as any individual vulnerabilities specific to the client or vendor. These elements are discovered through Know Your Business (KYB) measures, which collects information on applicants for risk categorisation. Additionally, applicant clients or vendors are checked against several blacklists, including international sanctions and Politically Exposed Persons lists. Negative media and poor reputation are also taken into account. Finally, in order to effectively act on any risk alerts or changes in vulnerabilities, an AML Compliance Officer must be appointed to make decisions and enact mitigation strategies when necessary.
It is essential to continuously observe clients and vendors for AML purposes, which can be difficult for organisations with a large network. Therefore, automated solutions like CyDesk can help by streamlining onboarding and initial AML examinations and subsequently providing ongoing monitoring of the risk statuses of clients and vendors. Using a mix of data streams, CyDesk automatically identifies and analyses key risks within cyber, compliance, operations and reputation, allowing your compliance team to effectively manage vulnerabilities.
The best approach to AML is proactive and based on accurate and up-to-date risk information. Implementing the best strategies using the right tools can go a long way to ensuring your own compliance and security against financial crimes.
This is part of a series of blogs on topics associated with Anti-Money Laundering. Check out our previous pieces on AML Directive Updates and KYB.