Risk based approach to anti-money laundering

The FATF (Financial Action Task Force) 40+9 recommendations contain language that permits countries to some extent to adopt a risk based approach to combating money laundering and terrorist financing. The language also authorises countries to permit financial institutions to use a risk based approach to discharge certain of their anti-money laundering (AML) and counter-terrorist financing (CFT) obligations.

In the UK, HM Treasury has decided that a risk based approach is entirely correct; by adopting such an appraoch competent authorities and financial institutions are able to ensure that measures to prevent or mitigate money laundering and terrorist financing are commensurate to the risks identified. This will allow their resources to be allocated in the most efficient ways.

The principle is that the greatest risks receive the highest attention. The alternative approaches are that resources are either applied evenly, so that all financial institutions, customers, products, etc. receive equal attention, or that resources are targeted, but on the basis of factors other than the risk assessed. This can inadvertently lead to a 'tick box' approach with the focus on meeting regulatory needs rather than combating money laundering or terrorist financing.

CIMA members can cascade this risk based approach for use in their own day-to-day practice work. There are some necessary precautions which the money laundering regulations require the accountant to take, notably customer due diligence, record keeping and training, but the CDD should be appropriate to the calculated risk of the client or suspected client being involved in money laundering activity.

For instance, if the prospective client is in another country,or deals with other countries (especially those outside the European Union, or with lower expectations than EU legislation), or is a high profile political person ('PEP'), the requirement is to perform enhanced due diligence. However, if the client is a government or EU department, or a publicly quoted entity, details of the identity of that entity may clearly be freely accessed and are in the public domain, simplified due diligence would be appropriate.

Sections 5A and 5B of the CCAB guidance are particularly relevant to CDD and both enhanced and simplified due diligence.

HM Treasury issues alerts from time to time in which it is recommended that greater care be taken when trading with certain other states (or even prohibiting such trade). You can subscribe to these alerts by signing up here.

A recent alert was issued following a warning by the Financial Action Task Force (FATF) on 28 February 2008 of the higher risks of money laundering and terrorist financing posed by deficiencies in Uzbekistan, Iran, Pakistan, Turkmenistan, São Tomé and Príncipe and the northern part of Cyprus.