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In one of our previous posts, we have discussed the tendency of using the risk-based approach for effective AML compliance. But what is it exactly? Originally, it was introduced in 2000 by the Final Conduct Authority in the UK. The anti-money laundering industry adopted the principle and has been using it since. As to define this principle, the risk-based approach means conducting AML compliance activities while taking into account the risk perception, the customers’ and the organizations’ risk levels.
Since each company and each client has a different risk appetite, it is not possible to apply the same processes of AML control for each case: this will not bring quality results. In fact, even institutions working in the same sector but coming from different countries do not have the same risk appetite. The reason being the unique economic structures and local AML legislation. Thus, the risk-based approach is necessary to use. Such an approach allows countries and companies to invent a tailor-made AML Control program suiting their needs perfectly while making sure to minimize risks effectively. It is no wonder that many local and global AML regulators keep recommending the risk-based approach.
The first important aspect of the risk-based approach is the ability to accept the existing risk. In the beginning, a risk assessment must be made, then it should be examined to become the basis of the new compliance processes.
The risk-based approach tells us not to use the same Know Your Customer procedures for all clients since customers with high risk and customers with normal risk levels do not belong to the same category. To illustrate, Political Exposed People are considered high-risk. That is why Customer Due Diligence procedures are not sufficient for them. Cases like these demand Enhanced Due Diligence procedures.
Generally, companies need to analyze and monitor their data regarding AML compliance all the time. Yes, it might sound overwhelming, but AML solutions with AI support facilitate these tasks.
Let’s observe the main measures recommended by the AML regulators:
KYC and CDD procedures are needed to be familiar with the true identity and intentions of the customer. These two measures can be truly called the crucial steps of effective AML compliance management. These procedures allow the financial institution to determine risks right in the first contact with the customer and then decide on the actions needed to be taken based on these risks. Risk analyses cannot be considered complete without customer due diligence.
It is necessary to search the customer’s name on different lists such as Sanctions or Watchlist to make sure there is no negative feedback about them. However, if there is any negative news on the customer, a company should reconsider cooperating with this client.
The AML compliance officer is a vital position in companies. Their task is to define money laundering threats and to be responsible for reporting suspicious cases to the authorities.
Once the client’s money laundering risk rating is determined, it serves as a basis for setting up the monitoring and restricting of real-time transactions. It is important to remember that the organization’s risk characterizations must be combined with the numbers of transactions to function adequately. Also, as large companies might have thousands of transactions daily, it becomes unrealistic to control all of them manually. Therefore, a perfect solution seems to be the AML Transaction Monitoring tool. The system monitors the transactions instantly and warns about any doubtful cases.
COREDO is here to develop AML compliance solutions that would be exactly perfect for your business. Obviously, we do not miss out on the effective risk-based approach.