Identifying and managing low money laundering risk. Perspectives on FATF's risk‐based guidance
| Published date | 09 October 2009 |
| Date | 09 October 2009 |
| Pages | 334-352 |
| DOI | https://doi.org/10.1108/13590790910993717 |
| Author | Louis de Koker |
| Subject Matter | Accounting & finance |
Identifying and managing low
money laundering risk
Perspectives on FATF’s risk-based guidance
Louis de Koker
School of Law, Deakin University, Geelong, Australia
Abstract
Purpose – The purpose of this paper is to investigate Financial Action Task Force (FATF)’s
risk-based guidance to combat money laundering and terrorist financing to determine its approach to
the identification and management of low-risk providers, products and transactions.
Design/methodology/approach – The paper analyses the relevant FATF recommendations and
its guidance notes and reflects on key questions for regulators and financial institutions.
Findings – FATF has not defined “risk” for purposes of the risk-based approach. The absence of a
clear definition complicates the identification of low-risk products. FATF do provide an example of a
risk matrix that can be used to identify low-risk banks, but the example is based on assumptions and
generalisations that are not sustainable. In addition, it identifies certain low-value transactions as “low
risk” transactions. The paper reflects on the role of value as an indicator of risk and concludes with a
number of suggestions to clarify the conceptual framework.
Originality/value – Low-risk products and transactions are often overlooked because the risk-based
approach focuses attention on high-risk matters. Low-risk products are however crucial to the efforts
to increase financial inclusion. The paper identifies gaps in the current conceptual framework and
indicates ways in which they can be addressed.
Keywords Money laundering,Terrorism, Financing, Risk assessment
Paper type Conceptual paper
The 2003 revised 40 Recommendations of the Financial Action Task Force (FATF,
2003) allow countries to implement a risk-based approach in relation to key elements of
their anti-money laundering (AML) and combating of financing of terrorists (CFT)
frameworks. A risk-based approach involves the development of appropriate risk
control measures based on a process of identification and categorization of risk.
In the AML/CFT context, the phrase is used in connection with regulation,
supervision and compliance. Risk-based regulation refers to the tailoring of rules to
focus on instances of higher risk. Risk-based supervision is an approach where the
supervisor focuses on risk as posed and managed by regulated entities and allocates
supervisory resources on the basis of their risk profiles. A risk-b ased approach
generally leads supervisors to devote less attention to entities that pose a lower risk
and rather focus their attention and resources on those posing a higher risk[1].
Regulated entities that follow a risk-based approach to AML/CFT compliance tailor
their control measures to fit the risk profiles of their different products and clients. The
main benefit of a risk-based approach in all three cases is an appropriate and efficient
allocation of resources[2].
Although the introduction of a risk-based approach to AML/CFT was welcomed, it
was not clear how this approach should be implemented within the FATF framework.
As a consequence FATF issued a number of guidance notes during 2007 and 2008.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1359-0790.htm
JFC
16,4
334
Journal of Financial Crime
Vol. 16 No. 4, 2009
pp. 334-352
qEmerald Group Publishing Limited
1359-0790
DOI 10.1108/13590790910993717
This article highlights key aspects of that guidance for financial service providers that
offer low-risk products and identifies a number of matters that FATF will nee d to
consider.
Much of FATF’s guidance focuses on the identification and management of
high-risk cases. This is a natural consequence of the risk-based approach. H owever, the
correct identification and management of low-risk products, clients and transactions is
of great regulatory and corporate importance. The AML/CFT framework is broad and
captures many products and transactions that do not pose a significant money
laundering or terror financing risk. The risk-based approach allows appropriate, often
simplified, controls to be implemented in respect of such products and transactions.
Simplified controls are easier and cheaper to implement and maintain. They also
impose a lesser burden on clients. When correctly implemented, these controls free up
resources that can be focused on higher risk cases. They also ensure that AML/CFT
controls do not pose an unnecessary barrier to low-risk clients wishing to access
low-risk financial products. Correctly designed and implemented controls for low-risk
products and clients are therefore regarded as an important element of a facilitati ve
financial inclusion regime (de Koker, 2006a, b; Bester et al., 2008; Chatain et al., 2008).
Primary challenges lie, of course, in the correct identification of those providers,
products and clients that pose a lower money laundering and terrorist financing risk
and in the formulation of responses that are proportionate to that level of risk. These
challenges can only be met if we clarify our understanding of risk and especially the
meaning of “low risk” in the AML/CFT context. FATF listed some indicators of
low-risk providers and products in the recommendations and in their guidance on the
risk-based approach. These indicators and some of the thoughts that underlie them are
discussed in this article.
This article is partly based on work funded by the FinMark Trust (de Koker, 2008)
and presented at the 26th Cambridge International Symposium on Economic Crime in
September 2008.
1. FATF and the risk-based approach
The “FATF” is the international AML/CFT standard-setting body. It issued its first set
of standards regarding the countering of money laundering in 1990. In 2001 these
recommendations, known as the 40 Recommendations, were complemented by a set of
special recommendations on the combating of terrorist financing. The recommendations
are not binding in law but the international community expects countries to comply with
the standards[3]. The majority of countries in the world form part of a framework that
evaluates their compliance with the FATF recommendations in terms of a stringen t
standard evaluation methodology.
The 40 Recommendations were extensively revised in 2003. The revised
recommendation introduced a number of new principles that underpin a risk-b ased
approach to AML/CFT[4]. In essence, the recommendations allow a risk-based approach
at two levels. Firstly, countries are allowed to be guided by their assessment of
AML/CFT risk when they design or amend specific elements of their AML/CFT
regulatory framework. Secondly, countries are allowed to permit individual institu tions
to design elements of their AML/CFT control measures on a risk sensitive basis (FATF,
2007a, para. 1.7).
FATF’s
risk-based
guidance
335
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