to those risk management decisions. In deciding on the degree of discretion to grant a financial institution, the supervisor should take into account several factors, including the maturity and sophistication of the sector and institution as well as the institution’s track record of AML/CFT compliance and its management of other risks. It is also important to take into account the supervisors’ experience in conducting risk-based AML/CFT supervision. In jurisdictions where the financial sector and AML/CFT supervisory framework are not well developed, the capacity of financial institutions to assess and mitigate their ML/TF risks may not be fully developed. In such cases, the discretion and flexibility allowed under a risk-based approach should be limited and phased in until such time as the institution’s or sector’s understanding of risks and experience in mitigating risks improve.
ADVERSE CONSEQUENCES The risk-based requirements of the FATF and their emphasis on the effectiveness of AML/CFT measures have raised the bar for financial institutions and their supervisors. Jurisdictions that have high ML/TF risk profiles and weak AML/CFT frameworks are vulnerable to abuse by money launderers and terrorism financers, especially if their institutions are weak as well. This situation weakens AML/CFT compliance in the financial sector as a whole. In the end, such financial institutions may lose their correspondent banking relationships, which can have additional effects on international business activities in the jurisdiction. Consequently, having a robust AML/CFT framework is an important prerequisite to mitigating ML/TF risks. As indicated in the introduction, the adverse consequences of inadequate AML/CFT controls for financial institutions can be grouped into three main interrelated risks: ●● Business risk ●● Reputational risk ●● Legal and compliance risk.
Business Risk Failure to comply with the AML/CFT legal and regulatory requirements can expose a financial institution to a range of enforcement actions and penalties, including restrictions on business. For more serious offenses, directors and other officials can be subject to civil and criminal liability and be barred from working in the sector. Additionally, a financial institution that is involved, intentionally or unintentionally, in ML or TF activities (or any of the associated predicate crimes) can also be criminally prosecuted. The adverse publicity that can accompany such action can have an especially adverse effect on the business of the institution. Other institutions with which the financial institution has a business relationship may start asking questions and inquiring about remedial actions, as could the supervisory body. Financial institutions listed on an exchange might see an adverse effect on their shares. In recent years, banks from jurisdictions perceived as having weak AML/CFT frameworks have lost correspondent banking facilities or faced restrictions on their use of such facilities. According to large, international correspondent banks, this so-called de-risking1 is due, in part, to the imposition of substantial financial fines on banks for AML/CFT violations in their own jurisdictions. Appendix A
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