In 2021, 58% of financial institutions reported that building risk assessment mechanisms remain one of the top challenges. Their absence can increase loopholes for criminals and failure in determining threats of money laundering. Identity theft, hidden UBOs, and concealing sources of funds are some of the most prominent ways that make it challenging for financial institutions to restrict the flow of illicit funds.
Anti Money Laundering (AML) controls are put into place to detect and prevent the illicit flow of funds. In this regard, risk assessment play a major role in determining the level of threat the customer poses. Furthermore, financial institutions can identify suspicious transactions in real-time and enhance security against criminals. This article highlights how AML solutions help in building efficient risk assessment programs.
Major Indicators of Money Laundering through Financial Institutions
Digital payments and easy access to online bank accounts have made it easier for criminals to conceal their illicit funds. By using stolen identities, they make efforts to escape regulatory scrutiny. Furthermore, inadequate AML security measures also leave enough space for fraudsters to exploit digital banking systems. In the wake of this, financial institutions require efficient risk assessment mechanisms for determining the threat of money laundering before onboarding.
Since criminals are deploying technologically advanced techniques to escape AML compliance, it has become challenging to counter all the risks simultaneously. However, financial institutions can place necessary restrictions by identifying factors leading to money laundering. The major indicators include customer profiles, services, products, and geographic location.
Services and Products
The levels of money laundering risks vary as per the types of products and services financial institutions deal with. Investment firms, brokerages, and banks are the most exposed to criminal threats as they deal with a huge flow of transactions. Fraudsters often create malicious websites to accept payments. Later they reroute them across financial institutions to change their status from dirty money to legitimate funds.
The concept behind money laundering is similar to the one from decades ago. However, digitization is accelerating the movement of dirty money while making it hard to trace and discourage illicit transfers. Financial advisory firms are not as exposed to risks as ATMs. Therefore, financial institutions require robust AML solutions to establish risk assessment mechanisms. They automate transaction monitoring while facilitating customers with a variety of services and products. Hence, AML verification solutions help financial institutions build strong defenses against criminal efforts.
Customer-Related Risks
Money laundering threats are equally prevalent in customers, where some are relatively riskier than others. This is due to various reasons, such as income sources, involvement in criminal activities, and others. Financial institutions dealing with businesses that involve more cash flow intensity are prone to face AML compliance risks and hefty penalties. Compromised behavior or involvement in illegal activities are other factors increasing money laundering threats.
High-profile customers such as politicians and international business owners possess more risk of money laundering. They often find ways to escape AML screening and government taxes. Similarly, dealing with foreign entities belonging to regions with lax anti-money laundering checks is another red flag. Therefore, in all of these cases, financial institutions require a risk assessment to determine off-shore account status and transaction histories.
Geographic Location
Similar to the customer and services-related threats, geographical locations also add in as money laundering red flags. Financial institutions dealing with clients or businesses operating in high-risk regions need to authenticate transactions more strictly. As per the Basel AML Index, many countries qualify as areas with more threat of money laundering. Haiti, for instance, is one such region mainly due to government turmoil and a high drug trade rate. Similarly, other regions include Madagascar, the Cayman Islands, the Democratic Republic of Congo, and Myanmar.
The major reason why countries become a part of sanctions is that they lack sufficient anti-money laundering controls. Therefore, financial institutions should consider risk assessment as their solution to prevent criminal threats.
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AML Systems – Meeting the Need of Building Risk Assessment Mechanisms
Developing efficient AML systems help financial institutions to prevent crimes and meet regulatory requirements. Federal Financial Institutions Examination Council (FFIEC) analysis suggests making risk assessment an integral part of anti-money laundering controls. This way, financial institutions can evaluate criminal threats associated with services, locations, customers, and products more easily.
AML solutions enable financial institutions to develop risk assessment control, and later they can mitigate the flow of illicit funds. Furthermore, they can combat corruption, bribery, money laundering, and terrorist funding.
Summarizing the Facts
As per the requirements put forth in the Bank Secrecy Act (BSA), FATF’s 40 Recommendations, and other such standards, the necessity of a risk-based approach is clear. It strengthens AML monitoring by identifying suspicious transactions and criminal intentions. Fraudsters drive financial institutions to reputational damage and a high risk of money laundering. On the contrary, risk assessment restricts their access and upholds integrity with an assurance of AML compliance.
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