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Risk based approach - country risk

This is the first article of a series about the deficiencies of the Risk-based approach.

The FATF last year published a Guidance on the Risk-Based Approach to combating money laundering and terrorist financing in close consultation with representatives of the international banking and securities sectors. The Guidance supports the development of a common understanding of what the risk-based approach involves, outlines the high-level principles involved in applying the risk-based approach, and indicates good public and private sector practice in the design and implementation of an effective risk-based approach.

I will start with country risk as, in my opinion, jurisdictions are the risk of risks.

As the FATF observed "there is no universally agreed definition by either competent authorities or financial institutions that prescribes whether a particular country or geographic area (including the country within which the financial institution operates) represents a higher risk. Country risk, in conjunction with other risk factors, provides useful information as to potential money laundering and terrorist financing risks. Factors that may result in a determination that a country poses a higher risk include:
• Countries subject to sanctions, embargoes or similar measures issued by, for example, the United Nations (“UN”). In addition, in some circumstances, countries subject to sanctions or measures similar to those issued by bodies such as the UN, but which may not be universally recognized, may be given credence by a financial institution because of the standing of the issuer and the nature of the measures.
• Countries identified by credible sources as lacking appropriate AML/CFT laws, regulations and other measures.
• Countries identified by credible sources as providing funding or support for terrorist
activities that have designated terrorist organisations operating within them.
Countries identified by credible sources as having significant levels of corruption, or other criminal activity.


In determining the levels of risks associated with particular country or cross border activity financial institutions and governments may draw on a range of publicly available information sources, these may include reports that detail observance of international standards and codes, specific risk ratings associated with illicit activity, corruption surveys and levels of international cooperation.

As the FATF stated in a previous report "The effective implementation of international AML/CFT standards requires not just appropriate legislative, regulatory and organisational structures but a robust system of governance to ensure the integrity of the systems in place. Corruption poses an important threat to good governance and is therefore a major threat to the effective implementation of AML/CFT regimes. The link between AML/CFT and corruption is twofold. Firstly, the proceeds of corruption, which may be considerable, are susceptible to being laundered. Secondly, corruption, and poor governance arising from corrupt institutions (such as the judiciary, the police, or regulatory authorities) and/or individuals, can substantially blunt the effectiveness of an AML/CFT system. While some consideration has already been given to the link between AML/CFT and corruption, there is a critical need to (i) develop a greater understanding of how corruption damages the effectiveness of AML/CFT systems, and (ii) develop appropriate strategies to deal with the issue." (Paragraphs 32 and 33 of the FATF Annual Report 2005-2006).

When reading this, can the FATF condone reports from the GRECO and the OECD (Working group on Bribery)?
Definitely not.
Non compliance to GRECO and OECD (Working group on Bribery) Recs should even be a reason for the FATF to consider a country as non-cooperative to be coherent.

07:00 Posted in General | Permalink | Comments (1)


Most interesting article. Look forward to the rest of the series.
The Risk Based Approach, a keystone of the "modern" approach to AML/CFT (anti-money laundering & counter financing of terrorism), is an extremely simple concept that seems fraught with diffculty when it comes to implementation. The concept is that you identify your risks across your customer base and business and apply your resources in direct proportion to the risk that you are accepting - not too difficult to grasp as a concept.
Financial Institutions and Financial Services Businesses (a subtle regulatory difference) seem to be in a quandry with the Risk Based Approach; they want want the flexibility to be able to make their own decisions to undertake whatever business in whatever manner they choose but in the same breath they want the guaranteed security of the regulatory 'safe harbour' of a prescriptive set of black and white rules with little or no room for manoeuvre. Fundamentally there is no wish to accept responsibility for decisions made whilst at the same time insisting on the freeedom to undertake the business they decide upon.
I remain puzzled and amused by the apparent inability to decision-make and acceopt responsibility for those decisions particularly when the individuals involved are arguably making important business decisions (possibly risk based) every day of the week. The problem that they appear to have is that what they do instinctively on a daily basis has now for AML/CFT purposes to be documented.
Rabbits and headlights come to mind.

Posted by: Charles O'S | 07/30/2008

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