Risk-Based Approach
A risk-based approach involves allocating compliance resources proportionally to the level of money laundering and financial crime risks posed by different clients, focusing enhanced due diligence on situations presenting higher risks as identified through risk assessments.
Related article: Third-party risk management.
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RBA
Examples
Three different people submit an application to open a bank account. The first person only wants a limited account where their pension can be wired to. From the bank’s perspective, this person presents a very low risk. Therefore, they conduct Simplified Due Diligence.
The second person wants a regular debit account. They don’t show up on any watchlists but could still be a risk. They are therefore categorized as a medium risk and Standard Due Diligence is conducted.
The last person is looking to make large international transfers. On top of that, during the screening process, they see that the person is a Politically Exposed Person. They present a high risk to the bank as both their status and the intended use for their account can be used for committing financial crimes. The bank therefore conducts Enhanced Due Diligence.
By doing it this way, persons who are a higher risk are monitored more closely while those who are a low risk are given a more lenient treatment – hence, a risk-based approach. Therefore, the bank doesn’t unnecessarily waste their resources while still ensuring that they can more effectively prevent financial crime.
FAQ
What are the benefits of a risk-based approach to compliance?
A risk-based approach allows banks to allocate more resources to higher risks, enhancing effectiveness and efficiency.
How are risk appetites and tolerances set?
Risk appetite is set by the board in line with business strategy, considering factors like revenue goals, customer targets and regulatory expectations.
How does a risk-based approach impact resource allocation?
More compliance staff, technology investments, and senior attention are directed to business lines, clients and products deemed higher risk.
