To help mitigate the impact of illicit money movements, the Bank Secrecy Act (BSA) and FINRA Rule 3310 have established anti-money laundering (AML) regulations that require financial institutions to develop robust and reliable AML compliance programs. One key component of these programs is risk assessment — evaluating current processes for common risk indicators that may necessitate corrective action.
In this piece, we’ll break down the basics of AML risk assessment, examine critical components and common risk indicators and offer insight on effectively integrating risk assessment into your more extensive AML compliance program.
What is an AML Risk Assessment?
An AML risk assessment is designed to identify places, processes, or policies in your organization that may allow criminals to conduct money laundering.
While risk assessments are not required by law to meet FINRA and BSA requirements, they offer a way to streamline and centralize the process of evaluating risk across your organization. They also allow teams to pinpoint specific areas of concern, document this data and take corrective action before money laundering occurs.
Put simply, risk assessments act as an ounce of prevention — it’s preferable to stop criminal activity before it starts instead of doing damage control after the fact.
3 Common Components of a AML Risk Assessments
While no two risk assessments will look exactly the same, several key components make up the foundation of successful compliance risk management efforts:
Risk profiles are evaluations of current company processes, such as transaction access and security, customer onboarding, and authentication/verification checks, to build a complete profile of potential risk.
For example, a risk profile might identify issues with existing single-factor authentication requirements for customers and indicate the need for additional security. Once complete, risk profiles provide a roadmap for companies to address key issues.
Risk categories within your organization may include cybersecurity, documentation, customer onboarding, or staff access to critical systems. These categories speak to broader concerns that may require more substantive efforts to mitigate over time.
To identify risk categories, it’s worth examining historical data to pinpoint common sources of concern — this, in turn, allows companies to create a priority list of categories from lowest to highest risk.
Risk sources are often external factors that may influence your total risk. These may include how customers find your company, where customers are located, and the type of transactions they want to conduct. In addition, internal operations — such as product lines or specific services you offer — may also be sources of risk.
Key Risk Indicators for Money Laundering
Money laundering efforts range from small, frequently-occurring transactions to large-scale efforts that span multiple countries. Regardless of type, however, five key risk indicators (KRIs) are consistent:
- Size and nature of a business
The larger your business and the greater the number of transaction types you offer, the greater your overall risk.
- Customer types
The types of customers common to your business — such as those conducting large-scale transactions or regularly moving between countries — can also increase risk.
- Types of products and services offered
Complex digital transactions or new services — such as cryptocurrency trading or blockchain-based transactions — are critical KRIs because they limit overall visibility.
- Methods of onboarding new customers
Customer onboarding that doesn't include robust identity verification (IDV) and authentication can pose significant risks if customers are on national watchlists or are identified as politically exposed persons (PEPs)
- Geographic risks
Specific geographic locations are tied to a greater risk of money laundering. For example, according to the Basel AML Index for 2021, Haiti, The Democratic Republic of the Congo, Myanmar, Mozambique, and the Cayman Islands are the top five countries for money laundering.
How Do AML Risk Assessments Work?
Practical AML risk assessments work by combining the components and indicators listed above to create a reliable and repeatable framework to help companies identify potential risks and conduct effective AML investigations. Organizations can get more from sharing risk assessments across FIs, allowing them to prevent fraudsters from entering their ecosystem in the first place.
Best practices for deploying risk assessments include:
- Comprehensive reporting: If risk assessments lead to identifying suspicious activity or transactions, companies must ensure they comprehensively document the incident. In some cases — such as insider abuses involving any amount of money or transactions greater than $25,000 — businesses are also obligated to complete a suspicious activity report (SAR).
- Clear issue identification: It’s not enough to simply recognize that issues exist. Businesses must also take steps to clearly identify root causes and develop solutions to address these issues, then create metrics that measure the success of remediation efforts over time.
- Continual use: One-off risk assessments will pinpoint issues in time, but given the dynamic nature of online and in-person transactions, occasional use isn’t enough to assess overall risk. To ensure effective coverage, companies should regularly schedule risk assessments to update risk profiles and identify risk categories. They should also implement processes that automatically trigger risk assessments, such as new customer onboarding or transactions from locations at high risk of money laundering.
Who Needs to Complete AML Risk Assessments?
AML risk assessments are worthwhile for any organization that conducts financial transactions. This includes banks and credit unions, investment firms, broker-dealers, casinos, and — more recently — cryptocurrency trading companies.
While these risk assessments are not required under FINRA and BSA rules, they’re an invaluable part of the more extensive compliance process. For example, suppose companies aren’t able to identify common risk sources.
In that case, they’re ill-equipped to make effective changes and limit the chances of successful money laundering, in turn putting themselves at risk of revenue loss, reputation damage, or in-depth regulatory audits.
However, by integrating reliable risk assessment frameworks as part of a more significant AML foundation, companies can set themselves up for AML success.
How to Integrate Risk Assessment into your AML Compliance Program
While risk assessments provide key indicators of potential money laundering pathways, they’re most effective as part of larger AML compliance programs. In practice, this requires end-to-end integration that ensures data from risk assessments is readily available to help businesses make better decisions.
Effective integration includes:
- Identification: Businesses must leverage risk profiles, categories, and sources — combined with KRIs — to pinpoint processes, policies, and products that increase risk.
- Consolidation: Organizations must effectively consolidate risk assessment programs with other AML processes such as authentication, verification, and transaction monitoring. While risk assessments offer value as standalone solutions, the dynamic nature of money laundering efforts means they’re more effective as part of a larger AML program.
- Documentation: Record-keeping is an essential part of effective risk assessment integration. By ensuring risks are thoroughly documented, AML compliance officers and C-suite leaders are better positioned to make informed AML decisions moving forward.
- Continuation: Effective assessment is a continual process that leverages historical data, current transactions, and emerging trends to address existing issues and evaluate future risks. As a result, there’s no end state for risk assessment; instead, assessments continually evolve to meet new conditions.
- Evaluation: Finally, businesses must regularly step back and evaluate their risk assessment program to determine what’s working, what isn’t, and what needs to change.
AML Risk Assessment Strategy: Final Thoughts
AML risk assessments are a critical component in anti-money laundering efforts. By leveraging comprehensive risk analysis capable of identifying key risk factors and potential remediations and then integrating these assessments into larger AML programs, organizations can simultaneously reduce risk and improve overall compliance. Combining fraud and AML efforts is the best way to provide true protection and security.
Keep in mind that you want to avoid bad fraud practices as much as you want to follow good ones to optimize your prevention efforts. For more information about how Unit21 can play a part in helping your organization identify suspicious transactions or potential bad actors, schedule a demo today.