Until the latter part of the 20th century, financial crime had a limited scope and was understood to include corruption, bribery, fraud, money laundering (ML), the proceeds of drug trafficking and other serious crimes. The term has expanded to include laundering the proceeds of any crime together with terrorist financing (TF), the financing of proliferation of weapons of mass destruction, breaches of financial and trade sanctions, market abuse and tax evasion. Financial crime covers a wide range of offences including insider trading, money laundering and terrorist financing.
To help establish uniform and effective measures, the Financial Action Task Force (FATF) was founded in 1989 on the initiative of the G7. The objectives of FATF (an international, intergovernmental body) are to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.
The FATF works to align international AML/CFT standards across its 37 current member states by issuing regular guidance to financial authorities. The FATF sets out its approach to AML/CFT in its ‘40 Recommendations’: EU member-state authorities and financial institutions seeking to understand or find out how to comply with FATF policy should consult the recommendations before implementing them in a manner consistent with domestic legal and financial systems. FATF recommendations range from implementing international conventions to introducing reporting and due diligence measures.
The Financial Action Task Force (FATF), along with numerous member countries, such as the UK and United States, urge risk-based controls. According to FATF, there are cases where the risk of money laundering or terrorist financing is higher, and the appropriate enhanced customer due diligence (CDD) measures have to be applied.
A Risk-Based Approach (RBA), in line with FATF recommendations, requires financial institutions to have systems and controls that are commensurate with the specific risks of money laundering and terrorist financing facing them.
A RBA involves specific measures and procedures such as:
(a) Identifying and assessing the ML/TF risks emanating from particular clients, services, geographical areas, and delivery channels of operation of the Licensed Firm and its clients.
(b) Documenting in the risk management and procedures manual, the policies, measures, procedures and controls to ensure their uniform application across the Licensed Firm by persons specifically appointed for that purpose by the Board of Directors / sole director / sole practitioner.
(c) Managing and mitigating the assessed risks by the application of appropriate and effective measures, procedures and control.
(d) Continuous monitoring and improvements in the effective operation of the policies, procedures and controls.
The RBA is carried out on a client basis during on-boarding and revised during the review of the relationship and on a firm-wide basis annually, taking into account the overall risks undertaken by the firm.
The RBA shifts the focus of AML compliance from post-analysis of data, to proactive judgment. Financial institutions must work on an ongoing basis to understand the money laundering threats they face and deploy commensurate measures to manage their risk exposure.
A RBA means that countries, competent authorities and financial institutions identify, assess, and understand the money laundering and terrorist financing risk to which they are exposed and, in accordance with the level of risk, take the appropriate mitigating measures. This flexibility allows for an efficient use of resources. Financial institutions, countries and competent authorities can decide on the most effective way to mitigate the money laundering/terrorist financing risks they have identified. It enables them to focus their resources and take enhanced measures in situations where the risks are higher and apply simplified measures where the risks are lower.
A reasonably designed risk-based approach is one by which institutions identify the criteria to measure potential money laundering risks. Identification of the money laundering risks of customers and transactions will allow institutions to determine and implement proportionate measures and controls to mitigate these risks. Risks for some customers may only become evident once the customer has begun transacting through the account, making monitoring of customer transactions a fundamental component of a risk-based approach.
In May 2020, FATF has issued a paper regarding risks and responses on COVID-19 related crimes which may lead to ML/TF. This paper is part of a coordinated and timely response to the impact of the COVID-19 crisis on global anti-money laundering (AML) and counter terrorist financing (CFT) efforts and the application of the FATF Standards. This response also includes a Statement from the FATF President, issued on 1 April, on how the risk-based approach of the FATF Standards provides for emerging threats and vulnerabilities to be managed effectively.
The key findings of the paper include:
- The increase in COVID-19-related crimes, such as fraud, cybercrime, misdirection or exploitation of government funds or international financial assistance, is creating new sources of proceeds for illicit actors.
- Measures to contain COVID-19 are impacting on the criminal economy and changing criminal behaviour so that profit-driven criminals may move to other forms of illegal conduct.
- The COVID-19 pandemic is also impacting the government and private sectors’ abilities to implement anti-money laundering and counter terrorist financing (AML/CFT) obligations from supervision, regulation and policy reform to suspicious transaction reporting and international cooperation.
- These threats and vulnerabilities represent emerging money laundering (ML) and terrorist financing (TF) risks. Such risks could result in:
- Criminals finding ways to bypass customer due diligence measures;
- Increased misuse of online financial services and virtual assets to move and conceal illicit funds;
- Exploiting economic stimulus measures and insolvency schemes as a means for natural and legal persons to conceal and launder illicit proceeds;
- Increased use of the unregulated financial sector, creating additional opportunities for criminals to launder illicit funds;
- Misuse and misappropriation of domestic and international financial aid and emergency funding;
- Criminals and terrorists exploiting COVID-19 and the associated economic downturn to move into new cash-intensive and high-liquidity lines of business in developing countries.
- AML/CFT policy responses can help support the swift and effective implementation of measures to respond to COVID-19, while managing new risks and vulnerabilities. These include:
- Domestic coordination to assess the impact of COVID-19 on AML/CFT risks and systems;
- Strengthened communication with the private sector;
- Encouraging the full use of a risk-based approach to customer due diligence;
- Supporting electronic and digital payment options.