The risk-based approach to anti-money laundering (AML)
The risk-based approach is a management tool for developing and managing a firm's systems and controls. It is a tool that should be used by both the FSA and the firms that we regulate. The FSA therefore expects that firms will act in a risk-based manner over AML and it is important that their supervisor's expectations reflect this approach.
A truly risk-based system will display a number of positive attributes: cost effectiveness, flexibility and proportionality. These features are essential for a regulatory regime that seeks to deliver value for money while successfully disrupting the criminals who would seek to use our financial system.
Cost effectiveness
The risk-based approach is not designed to be an easy option, nor is it necessarily the cheapest; this approach is about maximising benefits and not cost cutting. That is why we seek a more risk-based regime, to ensure money invested in money laundering prevention is done so effectively and efficiently, reducing wastage, concentrating on real risk and maximising the benefits to society.
Proportionality
The FSA neither expects, nor desires a zero failure regime as that would certainly be disproportionate. What we want to see is firms taking reasonable steps to identify and strengthen the weak links in their defences. Proportionate spending targeted at the real weak points in our systems means that it becomes more difficult for criminals to launder their ill-gotten gains.
Flexibility
The risk-based approach recognises that a lot of the expertise in assessing risk lies with the firms because it is they who have the knowledge and experience of their customers and products. Good risk-based regulation requires firms' senior management to manage risk and use their knowledge of their firm to develop systems that uniquely address the specific risks that they face.
Criminals themselves operate in a risk-based manner, constantly adjusting and updating their strategies based on the risks that they face. Firms' defences need to be flexible and dynamic enough to keep up with the changing face of money laundering and only a risk-based approach to AML can deliver such an outcome.
The risk-based approach in practice (money laundering)
For firms, the risk-based approach means a focus on outputs rather than inputs. Systems and controls such as customer identification, monitoring, reporting and training are important inputs but ultimately we are concerned with the impact of our regime on crimes that cause real social harm, crimes like theft, people trafficking, drug trafficking and terrorism.
There will always be a requirement for firms to monitor their customers' activities, but the specifics of how this is done can vary greatly depending on the nature of the risks they face and the type of products they sell. For example, a large retail bank with many customers will likely need to develop or purchase customer monitoring software whereas a smaller organisation can may be able to monitor its customers using a low tech solution.
Identification ID and Know Your Customer (KYC) should also be carried out on a risk-sensitive basis. For example an Old Age Pensioner opening a basic bank account is unlikely to require extensive procedures to identify them and the nature of their account usage, as long as sufficient monitoring arrangements are in place.
The staff training requirements of a firm are likely to depend on the particular risks that its staff is managing or which they are exposed to. Front-line staff will need one set of AML skills (such as spotting forged identity documents) whereas their managers who are tailoring the firm's overall AML systems and controls will have quite different needs.
Firms operating under the risk-based approach need to be proactive in seeking out information regarding money laundering trends and threats from external sources such as law enforcement as well as relying on their own experiences and observations. This allows firms effectively to review and revise their use of AML tools to fit the specific risks that they face.