The FATF’s Risk-Based Approach

The Financial Action Task Force (FATF) is an inter-governmental policymaking body whose purpose is to establish international standards and to develop and promote policies to prevent and combat money laundering and the financing of terrorism. For over thirty years, the FATF has been establishing its standards through its own Recommendations, a comprehensive set of guidelines aimed at countries to implement within their legal and regulatory systems, as well as preventive measures that financial institutions should apply into their business operations.

According to the FATF Recommendations, financial institutions must implement an AML program that incorporates a risk-based approach. The rationale behind such an approach is that the global financial system is ever evolving, and so are the risks it faces, and therefore only an approach which acknowledges these risks can successfully mitigate them. Thus, a risk-based approach to AML/CTF requires that financial institutions identify their exposure to the threat of money laundering and criminal financing risks and take the adequate measures to mitigate and prevent those risks. While the FATF acknowledges that a Risk-Based Approach is not a fool-proof or “zero failure” approach, and that instances of money laundering may still take place despite a financial institution’s best efforts, one thing is clear:

Each financial institution must implement a safe and effective CIP to accurately identify and assess the risk of doing business with individual customers and other businesses, even if the risk of money laundering or financing of crime is low. A risk-based approach requires proactive assessment but also allows for a great measure of flexibility. This flexibility is necessary to address evolving risk and the technological threats that financial institutions face. The risk assessment required by a risk-based approach can and should be supplemented by intelligent procedures and technology which can save costs, increase safety and accuracy and streamline processes.

When implementing a CIP under the risk-based approach the following identification and screening processes ensure that risks presented by forming business relationships with customers are assessed, mitigated, monitored and documented:

• Identity proofing and verification;

• Age verification

• Collection and verification of a customer’s address concept;

• Initial AML screening

• Company document verification;

• Identification of a company’s beneficial owners;

• Sourcing of a customer’s wealth.

Going forward, we find out how Fractal ID’s own technology contributes in the implementation of these processes in a dynamic, agile, and compliant manner.