40 Finance Monthly. Bank i ng & F i nanc i a l Se r v i ce s for their crimes. At a financial institution level, this is arguably harder to assess – does an increase in suspicious activity reports (SARs), as one possible measure, point to a more or less effective program? The answer could be argued either way. The reality for most financial institutions producing intelligence output in the form of SARs is that there is often no feedback provided as to whether the information was useful to law enforcement or not. The consideration of effectiveness was highlighted by the Financial Action Task Force (FATF), the global AML standard setter, in 2019, when they announced a strategic review of their country’s evaluation process. Amongst the goals of the strategic review was to consider ways in which changes could be made to the FATF methodology to encourage countries to more effectively combat money laundering and terrorist financing. It was noted that the existing FATF process motivated countries to take action in order to avoid a bad report, rather than with a focus on reducing harm to society or protecting the integrity of the financial system. In other words, the focus had been on implementing a process rather than assessing outcomes. A risk-based approach Where resources are inevitably stretched, concentrating on risk is more likely to produce effective outcomes. The FATF strategic review was finalised in March 2022 with approval of the procedures for the fifth round of mutual evaluations, which will have a greater focus on risk to ensure that countries focus efforts on the areas where risks are highest. The next cycle of FATF evaluations will also be shorter, with a stronger follow-up process that will focus primarily on improving effectiveness. Earlier, in March 2021, FATF had issued guidance to support countries to take a risk-based approach to supervision. Supervisors play a key role in helping regulated entities to understand the risks they face and how to mitigate them, for example by providing guidance on linking a national risk assessment to an entity’s risk assessment. The EU’s 4th Anti-Money Laundering Directive (4AMLD) mandated that the European Commission conduct an assessment of money laundering and terrorist financing risks affecting the internal market and relating to cross-border activities, and to update it at least every two years. These assessments provide useful insight into identified money laundering risks which can be leveraged at a national level. The 5AMLD further mandated that Member States make the results of their risk assessments available to the European Commission and the other Member States, and to make a summary version, without classified information, publicly available. The European Banking Authority, also in 2021, issued revised guidance regarding risk factors for money laundering and terrorist financing, addressed to both financial institutions and supervisors. The guidance sets out risk factors for financial institutions to consider with respect to customer relationships and transactions. They also note that business-wide risk assessments should be performed at least annually, and that they should consider specific sources of information, including the European Commission’s supranational risk assessment referenced above. Information, information, information The risk-based approach, in terms of assessing where higher risk is likely to exist (for example in a specific product, client sector or geography) and targeting those areas, undoubtedly makes sense. But what is even more effective, is the sharing of information where there is already identified criminality. The traditional model of transaction monitoring produces vast numbers of alerts which are usually reviewed manually in order to determine whether the activity appears ‘suspicious’. A single-institution reviewing a customer’s behaviour may find it extremely difficult to make that determination of suspicion. However, the potential penalties for not filing a SAR are such that a huge number of ‘defensive’ SARs are submitted by institutions every year; the aim being to
RkJQdWJsaXNoZXIy Mjk3Mzkz