AML Risk Assessment

A risk-based approach is essential for financial institutions in order to identify and manage illicit activity risks. Organizations like the FATF, a global anti-money laundering compliance watchdog, also recommend risk assessments to quickly and accurately detect various vulnerabilities or avoid unacceptable risks altogether. Failure to comply with AML rules can result in severe penalties and regulatory audits.

Determining risk categories is often the first step in the risk assessment process. The number and detail of these categories can differ depending on the financial institution’s size, complexity, and organizational structure. Identifying risk categories is specific to each company, and there are no mandatory risk categories.

For example, the Federal Financial Institutions Examination Council (FFIEC) highlights four key categories for AML risk assessments in the financial sector:

• Product risk
• Service risk
• Customer risk
• Geographic risk

Risks identified during an AML risk assessment generally align with broader categories that aid in understanding the relationships between different types of risk.

Companies can perform AML risk assessments either manually or by using automated risk assessment tools or AI-powered AML software. Using at least some sort of automation allows for detailed analysis of customer behavior, transaction patterns, and other important data required for a robust AML program. 

Companies should consider certain factors when building their AML risk assessment. For example:

• The nature, size, and complexity of the business.
• Target markets.
• Distribution channels.
• The volume and size of transactions.
• Findings from internal audits and regulatory reviews.
• The number of customers already identified as high risk.
• The jurisdictions to which the company is exposed, either through its own activities or those of its customers.

Companies that want to conduct a proper AML risk assessment, categorize risk levels, and develop client risk profiles should use the following AML compliance measures to better assess and identify risks: 

• Identity verification for ensuring Customer Identification Program (CIP) and standard Know Your Customer (KYC) process requirements.
• Customer Due Diligence (CDD), including both Simplified Due Diligence (SDD) and Enhanced Due Diligence (EDD) measures. 
• AML screening procedures, such as databases screening against global watchlists, sanctions lists and Politically Exposed Persons (PEPs) lists. 
• Transaction monitoring, which helps keep records, spot AML red flags and report suspicious activities.
• Internal auditing and testing focus on evaluating staff training and independently assessing the effectiveness of the AML program.

Essentially, a customer risk assessment is part of the organization’s broader AML risk assessment framework. It is a single measure that focuses on evaluating individual customer risks as a key component of the larger AML risk assessment process.