Explaining De-Risking: A Look at Risk Mitigation Strategies
In the world of anti-money laundering (AML) compliance, the concept of de-risking has become increasingly important. De-risking refers to the strategic move by financial institutions to terminate or restrict business relationships with clients or categories of clients to avoid perceived higher risks of money laundering and terrorist financing, as defined by the Financial Action Task Force (FATF).
However, de-risking should not be a blanket approach. Instead, it should be managed through a targeted, risk-based framework that balances AML effectiveness with the preservation of financial inclusion. Here are some key best practices for de-risking:
- Implementing a Risk-Based Approach (RBA): Financial institutions should focus their AML efforts on higher-risk customers or activities by applying enhanced due diligence and may apply simplified measures to lower-risk cases. This allows for efficient use of resources and prevents inappropriate de-risking motivated by a blanket aversion to risk.
- Conducting Robust Customer Due Diligence and Continuous Monitoring: At onboarding and throughout the client relationship, institutions need robust, ongoing risk assessment and monitoring to detect suspicious activities without prematurely terminating relationships unnecessarily.
- Engaging in Public-Private Partnerships (PPPs) and Information Sharing: Collaborations between financial institutions, regulators, and law enforcement facilitate the detection of complex money laundering schemes and reduce regulatory uncertainty that may drive unwarranted de-risking.
- Developing Clear Legal and Data Protection Frameworks: Ensuring compliance with privacy laws while enabling effective sharing of information between public and private sectors mitigates unintended impacts on de-risking practices, helping maintain customer inclusion in the financial system.
- Avoiding Overly Cautious or Blanket De-Risking Decisions: Supervisory authorities have noted declines in unwarranted de-risking due to better targeted risk management and regulatory guidance, highlighting the importance of proportionate AML measures tailored to real risk, rather than broad exclusions of entire sectors or geographies.
In addition to these practices, companies can also implement various measures to limit their exposure to high-risk individuals, entities, activities, or regions. This can include limiting or stopping certain products or services associated with higher money laundering risk, implementing face authentication checks for large transactions and run periodic verification checks to lower the risk of account takeovers, and using workflow automation, behaviour pattern monitoring and analysis tools, and checks like bank account or credit card verification.
De-risking can take on various forms, including selective client onboarding, product and service limitations, termination of relations, and geographic restrictions. It can involve avoiding certain clients, products, and segments, and can also exclude certain geographic locations or industries. However, it's important to note that de-risking may not necessarily eliminate underlying AML risk, as it could drive illicit financial activities further underground.
In conclusion, de-risking should be a strategic assessment by companies to reduce exposure to high-risk individuals, entities, activities, or regions in order to minimize compliance- and operations-related risks associated with money laundering or terrorist financing. By adopting a risk-based approach, financial institutions can effectively manage their AML responsibilities while maintaining financial inclusion.
- To minimize the risk of money laundering or terrorist financing, businesses should consider implementing data-and-cloud-computing solutions for advanced customer profiling and risk assessment, ensuring personal-finance data privacy and security.
- In their strategy for investing in new business sectors, companies should carefully analyze the associated risks, considering the potential for higher money laundering activities and the need for technology-driven AML measures.
- In addition to traditional AML practices, financial institutions can leverage technology solutions like artificial intelligence and machine learning to identify patterns in financial transactions that may indicate money laundering activities, thereby enhancing their de-risking efforts.
