Navigating the complex world of anti-money laundering regulations and ensuring all aspects of your AML/CFT frameworks are fit for purpose can be difficult, but is an essential requirement for many businesses. At the heart of ensuring your compliance with the AML/CFT Act is your AML risk assessment. It is a crucial document where inherent risks that could be encountered in your business are documented.
In this comprehensive article, we will break down the requirements of a robust AML risk assessment (or to give its full title AML/CFT risk assessment), from understanding what they are to practical tips for implementation.
What is an AML risk assessment?
An AML risk assessment is:
- a review of your business to identify and evaluate money laundering and terrorist financing risk to your business.
- analysing various areas of your business, such as your customer profiles, transaction patterns, geographic locations, products/services offered, delivery channels, institutions dealt with, and business nature,size and complexity.
- rating the risks identified as to the likelihood and consequence of the risks happening in your business.
By conducting a thorough risk assessment, you can identify potential vulnerabilities in these areas and tailor your anti-money laundering measures to address these specific vulnerabilities.
AML risk assessment requirements
Your risk assessment doesn’t necessarily need to be complex, particularly if you are a small business, however ensure you identify the risks you see in your business, and remember this isn’t simply a ‘tick box’ exercise. It cannot be a generic document, it should involve a deep dive into understanding your customer base, the nature of the transactions, and the overall operational environment of your business.
As the Department of Internal Affairs (DIA) reminds us when advising on requirements for risk assessments:
“Generic content relating to the ML/FT risks associated with a sector, without consideration of that reporting entity’s business, will not comply with section 58 of the AML/CFT Act.”
A good starting point is to assess the AML/CFT risk to your business by looking at the following areas:
1. The nature, size, and complexity of your business
Some businesses by the very nature of their size, products or services provided, or structure will naturally pose more risk than others. 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.
2. The products and services offered
High value products which involve large amounts of money can be seen as a vehicle to move and launder money quickly. If you regularly deal with high volume, high value transactions, or complex interactions with international markets there is the potential for criminals to hide illicit activities. Assess the likely risks and apply the necessary measures to mitigate this.
3. The methods and channels used to deliver products and services
The delivery of some services/products may not require face-to-face involvement or intermediaries may be used. Evaluate whether the lack of in-person contact exposes you to higher risk, and what you can do to alleviate this.
4. The types of customers you work with
Ensure you understand the level of risk associated with your customer. Consider whether your customer represents a trust or another vehicle for holding personal assets, whether they have a company with nominee shareholders or shares in bearer form, or if they are a politically exposed person (PEP). These and other factors will help determine the level of risk your customers may pose to your business.
5. The countries you deal with
Understand what country your client resides in and the risk rating of that country. Note whether your customer is a non-resident client from a country that has insufficient anti-money laundering and countering financing of terrorism systems or measures in place so you can evaluate the risk this may pose. If your customer is from a high risk country you may decide not to onboard them.
6. The institutions you deal with
Understand the relationship of the institutions you deal with. You may have exposure to different institutions including other gatekeepers such as banks or financial providers. Consider how this impacts your business. Consider if the institution has been subject to any AML/CFT related findings.
As you review these areas in your business, categorise and prioritise risks identified, and provide a clear roadmap for mitigation strategies, which will be documented in your AML/CFT Programme. The supervisors have issued the Sector Risk Assessment which provides useful guidance to identifying potential risks in the varying sectors.
An AML risk assessment matrix can help you with this.
AML risk assessment matrix
Using a matrix facilitates a structured approach to analysing data and making informed decisions. It allows you to assess each area of your risk assessment. The Supervisors recommend a matrix based on the complexity of your business.
Low complexity business
This matrix assesses risk by only one factor. It considers the likelihood of ML/TF activity. This assessment should consider every risk factor you have identified. For example, likelihood could be categorised as:
- Very unlikely;
- Possible;
- Likely; or
- Very likely
Medium complexity business
Medium complexity uses two factors to show how likely it is for the risk to occur and the consequence of that risk:
- Likelihood – the potential for ML/TF to occur
- Impact – what would happen to your business
This should provide you with a more comprehensive understanding of your risk and a robust framework to help you arrive at a final risk rating.
High complexity business
More complicated and comprehensive assessments of risk may suit larger businesses with multiple products or services. It should take into consideration the threat to business, how vulnerable you are, and how risk is compounded over various risk scenarios.
Incorporating an AML risk assessment matrix into your compliance programme not only helps protect your business but also demonstrates a commitment to combating financial crime effectively.
Putting your AML risk assessment into practice
Implementing an effective anti-money laundering risk assessment is crucial for businesses to combat financial crimes. However, conducting the assessment is just the first step. To ensure its effectiveness, it’s essential to put your AML risk assessment into practice effectively.
1. Regularly review and update your AML risk assessment in line with any changes in regulations or business activities
This ongoing process will help you stay ahead of potential risks and compliance requirements. For instance, make sure any changes in legislation are implemented and updated in your AML/CFT framework documents.
For example, in July 2023 the definition of a country that has insufficient AML systems in place, changed to ‘a country identified by the Financial Action Task Force (FATF) as being high risk jurisdiction subject to a call for action.’
This new definition should have prompted an update to your risk assessment.
2. Create a well-informed team with staff training
Ensure that all staff members are well-trained on AML policies and procedures and they are familiar with the compliance documents for your business. They should understand the importance of your risk assessment, your ML/TF risks (as per your risk assessment) and be able to respond appropriately when risks are encountered.
A compliance officer or designated person can help oversee the implementation of the AML risk assessment measures. This person should have a clear understanding of regulatory requirements and be proactive in addressing any issues that may arise.
3. Don’t set and forget – apply and monitor
Ensure the AML risk ratings criteria you have outlined in your risk assessment are being applied, and that the processes you have implemented around combating risks in your business are being monitored to make sure they are being followed.
For example, if you believe a client is high risk, carry out enhanced due diligence (EDD) but also use your risk assessment to help inform you whether or not this client meets the high risk criteria for your business.
By ensuring you integrate your AML risk assessment into everyday practices, you can strengthen your anti-money laundering efforts and protect your business from illicit financial activities.
How to write your AML risk assessment
An effective AML risk assessment needs to be documented, to comply with regulations, and so it can be effectively used and applied by relevant teams.
To help with this mandatory requirement, utilise guidance from sector supervisors such as the DIA who have created sector specific guidance and take into consideration the National Risk Assessment written by the Financial Intelligence Unit (FIU).
This is a key starting point when writing your risk assessment or reviewing your risk assessment.
Your risk assessment document should:
- Outline the methodology used to assess the money laundering risks faced by your business. Different methodologies can be used as shown above in the AML risk assessment matrices; however, your methodology should be appropriate and proportionate to your business needs.
- Provide a clear overview of your business, its size, nature of business, and complexities.
- Articulate clearly how your risk assessment is the foundation of your AML compliance programme.
- Demonstrate how you will keep your risk assessment up-to-date.
- Clearly show the level of money laundering risk faced in the normal course of your business, and what areas of your business are impacted.
- Show whether some variables are more important to your business, or carry more weight than others in your risk assessment. This may not be necessary for your business, but if it is, document it.
- Demonstrate you have considered the inherent risks associated with your business. Inherent risks are the ML/TF risks that have been assessed before any controls or mitigants have been put in place.
- Establish whether compounded risk may be a factor for your business. For example, do you offer high risk products to customers in high risk countries? Combining these two factors could result in a very high compounded risk.
- Consider whether there may be occasions where your risk assessment could be overridden. If this is a likely scenario, your risk assessment should describe how this would operate, how it is approved and how it is recorded.
- Ensure any regulations relevant to your business have been accounted for in your risk assessment.
- Show how you communicate key and emerging risks to relevant employees.
Once you have written your risk assessment, don’t file it away and forget about it. It should be a living document that can be referred to and applied in real circumstances. For example, it may be used when dealing with a complex customer or complex transaction to establish the level of risk to your business.
How often do you need to do an AML risk assessment?
Note, your risk assessment is required to be independently audited every three years. The supervisors expect you to review it annually to ensure it has captured any changes to your business or regulations, and remains an effective tool to protect your business.
A good time to review it is when your annual report is due.
Conclusion: protect your business and reputation through implementing and maintaining robust AML risk assessments
An effective AML risk assessment involves identifying and evaluating risks unique to your business and industry sector, and implementing robust measures to mitigate them. Taking proactive steps to assess money laundering risks is key to protecting your business reputation and assets.
This process is not static but requires ongoing review, considering changes in regulations, your business, and emerging criminal strategies.
To get help with your risk assessment and ensure compliance, contact our team of experts who can guide you through the process and provide tailored solutions to meet your specific needs.
Don’t wait until it’s too late – start building a strong risk framework today.
