Dealing with clients in countries with a less stringent AML regulations may expose you to further risks and high profile clients or politically exposed persons (PEPs) may also heighten the risk factor. If you are a large business with complex structures consider how some activity may be higher risk and how the nature of your business might provide the potential to hide or mask suspicious activity. Please note that we have not weighted https://www.xcritical.com/blog/aml-risk-assessments-what-are-they-and-why-they-matter/ any of the risk factors higher than the others. It is up to you and your firm (based on your firm’s risk appetite) to determine the weights to apply to each of these risk components. Businesses that are covered by the Money Laundering Regulations have to use a risk-based approach to prevent money laundering. If you work with many cash-intensive businesses, you are more prone to compliance issues because of their compromised behavior.
You need to carefully assess customers who have a history of suspicious transactions, a cloudy background and no obvious way of earning their income. If you do not carefully monitor your customer risk, you may face crippling fines. Risk assessments identify your organization’s areas of vulnerability, which lets you determine how to correct problems in your AML efforts. Your risk assessment structure will depend on the size and organization of your business and the types of products and services it offers.
Risk Assessment in Customer Onboarding Process
Models often contain risk factors that fail to distinguish between high- and low-risk countries, for example. In addition, methodologies for assessing risk vary by line of business and model. Different risk factors might be used for different customer segments, and even when the same factor is used it is often in name only. Different lines of business might use different occupational risk-rating scales, for instance. All this impairs the accuracy of risk scores and raises the cost of maintaining the models.
Often, excessive dealings with foreign entities are a red flag, especially if they are countries with lax financial laws. Laundering money through off-shore accounts is one historically successful way to avoid AML enforcement. Be sure to complete a sanction screening to confirm that any individual you are working with is not on any sanction lists. And remember, doing business with PEPs is not necessarily banned, it is simply deemed high risk. FINRA examiners will bring deficiencies they find to your attention during the exam.
Flushing out the money launderers with better customer risk-rating models
You must assume that at least some of these organizations are engaged in illegal activity. It’s a good idea to remember that some delivery channels can increase money laundering risk, especially if they can disguise the true identity of the client’s activity. Remember to consider whether the service/product will be delivered in person or remotely or provided directly or via an intermediary. Let’s take a deep dive into why an AML risk assessment is necessary and the best practices for conducting an effective AML risk assessment as part of a larger AML compliance program. Also, even if your firm only does business in private placements and does not handle funds or securities, it must still follow CIP for all new customer accounts.
FINRA, a highly regarded, independent, non-government agency, dictates that many clients run independent testing every year, so an annual risk assessment for everyone is probably a good idea. Doing so will lower your risk of money laundering activity and help you meet regulatory requirements. Your risk scores (low risk, high risk, highest risk) will then be up-to-date and help keep you compliant with AML regulations. Unfortunately, despite the risk assessments, controls and strict processes we implement, financial fraud is evolving faster than ever. In fact, in 2022, financial services businesses saw a 79% increase in document fraud compared to the previous year. Given the state of the current economic climate, this situation isn’t predicted to settle anytime soon.
The risk-based approach
FINRA wants to see what your firm does beyond simply complying with SEC and FINRA Books and Records rules. FINRA expects your firm to have procedures to determine when you need to go above and beyond the basic customer identification process. Your examiner will https://www.xcritical.com/ review these procedures and check to see that your firm has followed them. For example, if you deal with customers such as off-shore trusts, your procedures may include additional due diligence to obtain information about the account’s beneficial owners.
These are just some examples of money-laundering risk categories for your firm to consider, and there are certainly more. The PATRIOT ACT requires all broker-dealers to develop and implement an anti-money laundering (AML) compliance program that complies with the Bank Secrecy Act. Consistent with these requirements, NASD and NYSE adopted AML compliance program rules.
Creating a Risk-Based Program
A robust and effectively implemented AML program is integral to a firm’s overall supervision and compliance program. This means that FINRA is responsible for reviewing a firm’s compliance with AML rules during routine exams regardless of firm size or business model. You document each step, so you can prove to government officials that you take money laundering very seriously. Most AML risk assessments involve organizing your customers into groups based on how likely they are to launder money. They are best qualified to identify the risk factors that a model requires as a starting point.
- The purpose of these rules is to help detect and report suspicious activity including money laundering, terrorist financing, securities fraud, and market manipulation.
- Maintain your business money laundering risk assessment with an online account.
- There is a significant money laundering risk that comes when organizations don’t have stringent Know Your Customer (KYC) precautions in operation.
- An effective sanctions risk assessment (SRA) measures the inherent sanctions risks a financial institution is exposed to and the effectiveness of its risk controls.
The next step is to classify the risk level for each of the KRIs you identified. Having adequate compliance staff is essential to the success of any AML program. Ensure that you have the appropriate number of staff available and that they have adequate training.
How can you elevate your AML risk assessment?
The Federal Financial Institutions Examination Council (FFIEC) manual provides general guidance on developing and updating a BSA/AML and OFAC risk assessment for financial organizations. Appendix J of the FFIEC online manual includes a Quantity of Risk Matrix and Appendix M includes a Quantity of Risk Matrix—OFAC Procedures. Sanctions.io is a comprehensive API-first solution that businesses can use to scan their clients and business partners against global Sanctions Lists, Crime lists and PEP lists.