Advantages of Risk-Based Approach over Checklist Approach in AML Compliance
Before the risk-based approach was developed and implemented, businesses used to employ the checklist approach, which focused on meeting the bare minimum Anti-Money Laundering (AML) compliance requirements without adequately focusing on mitigating financial crimes. The checklist approach brought in inefficiencies in AML compliance, and therefore, resulted in a critical shift to the risk-based approach. In this infographic we will discuss the advantages of risk-based approach over the checklist approach in AML compliance.
Meaning of Checklist Approach in AML Compliance
The checklist approach refers to following the rules and instructions in the same manner in every situation. The focus of the checklist approach is to tick mark to the bare minimum AML regulatory requirements while failing to focus on addressing the mitigation of financial crimes such as Money Laundering (ML), Terrorism and Proliferation Financing (MLTPF) risks. Such an approach leads to the development of a one-size-fits-all AML systems, without paying adequate attention to the specific MLTPF risk exposure of the business.
Meaning of Risk-Based Approach in AML Compliance
A risk-based approach to AML compliance involves identifying and assessing the MLTPF risks a business faces and adopting risk mitigation measures that are proportionate to the level of MLTPF risks assessed.
Advantages of Risk-Based Approach over Checklist Approach
The advantages of the risk-based approach over the checklist approach in AML compliance include the following:
Enables Timely Detection of MLTPF Risks:
The risk-based approach consists of steps and procedures like identifying and assessing the MLTPF risks a business faces also known as the inherent risks, implementation of risk controls measures, evaluating residual risks, determining risk appetite, followed by implementing additional risk mitigation measures accordingly. This way, MLTPF risks are quickly detected and timely actions to address them are taken. On the other hand, the checklist approach does not take into account the particular MLTPF risks a business may be exposed to, and therefore these specific risks may remain undetected.
Allows Evidence-Based Decision Making:
The risk-based approach allows business to take evidence-based decisions about risk mitigation measures to be adopted, which is based on the MLTPF risk assessment it conducts. Meanwhile, a checklist approach is standardised and does not involve risk assessment which results in ineffective decision making.
Focuses on MLTPF Risk Mitigation:
While a checklist approach focuses on ticking the box of various AML compliance tasks, a risk-based approach focuses on the mitigation of MLTPF risks by adoption and implementation of AML controls which addressed the MLTPF risks assessed.
Increases Efficiency:
The risk-based approach works on the principle of higher the risks, higher the controls. It is therefore efficient in managing and mitigating the MLTPF risks a business faces. While on the other hand, a checklist approach results in a rigid approach to AML compliance and does not take into account the specific risk exposure of the business. It is therefore inefficient.
Improves Adaptability:
The risk-based approach is adaptable because it enables businesses to update their MLTPF risk mitigation measures whenever their risk appetite or risk exposure undergoes a change. This may be due to reasons such as a change in the nature and size of business, introduction of new products and services, etc. On the other hand, a checklist approach is static. There is not much scope of change and adaptability.
Improves Cost Effectiveness:
The risk-based approach helps businesses in allocating their limited resources in an efficient manner by targeting their efforts on the areas of higher MLTPF risk. The checklist approach is not flexible, and under it, businesses adopt the same risk control measures for every MLTPF risk which results in cost-ineffectiveness.
Final Thoughts on Advantages of Risk-Based Approach over Checklist Approach
In contrast to the checklist approach, the risk-based approach enables businesses to address different levels of MLTPF risks, allocate their resources cost-efficiently while complying with their AML compliance obligations effectively.
