In most jurisdictions, banking and other financial services are a very important part of the financial system. Banking is the conduit for most domestic and international payments; it intermediates deposit-taking and lending activities and other financial products and services. Given their role in domestic and international payment systems, banks and other payment service providers hold a central and strategic position in a jurisdiction’s AML/CFT framework. This gatekeeper role also exposes them to domestic and international ML/TF activities. In most, if not all, national risk assessments, the banking and payment service sectors have been assessed as having a high level of exposure to ML/ TF risk. Therefore, the sectors dealing with payments should have in place adequately robust AML/ CFT compliance systems to protect the integrity of the financial system and the wider economy. All jurisdictions must balance the need to protect the banking and financial sectors from ML/TF abuse by implementing AML/CFT requirements, on the one hand, and the need to minimize the risk of unnecessarily restricting access to financial services by the poorer segments of society (financial inclusion), on the other hand. These citizens, as well as others, may have difficulty, for example, satisfying the customer due diligence requirements imposed on financial institutions. The Financial Action Task Force (FATF) recommendations and, in particular, the risk-based approach to AML/CFT compliance provide sufficient flexibility to mitigate the risk to financial inclusion by, for instance, applying simplified measures for lower-risk cases and expanding access through technological innovations in case of non-face-to-face situations. A risk-based approach may also foster financial inclusion for low-income segments of society; for example, jurisdictions may allow exemptions in or deviations from the application of the FATF recommendations based on an institution’s proven low risks or allow financial institutions to be more flexible in their application of customer due diligence measures. The risk-based approach to compliance can contribute to greater inclusion, transparency, and traceability of financial flows in these ways.
Promoting Safe and Sound Banking Practices In addition to an overall effective AML/CFT framework based on the FATF standards, policy makers also have a responsibility to promote safe and sound banking practices. A comprehensive and robust AML/CFT regime for banks can mitigate ML/TF risks in the banking sector. In this regard, the Basel Committee on Banking Supervision (BCBS) has issued a set of principles on bank supervision: the Core Principles for Effective Banking Supervision (BCPs). These principles contain several AML/CFT requirements (BCBS 2012). In particular, according to BCP 29, “The supervisor determines that banks have adequate policies and processes, including strict customer due diligence rules to promote high ethical and professional standards in the financial sector and prevent the bank from being used, intentionally or unintentionally, for criminal activities.” The assessment methodology further requires that, among other requirements, AML/CFT policies and processes are integrated into the banks’ overall risk management framework to enable supervisors to identify, assess, monitor, manage, and mitigate ML/TF risks at both the bank and the group-wide levels. The BCBS has also issued guidelines on sound management of risks related to money laundering and financing of terrorism that, while intended primarily as guidelines for banks, also include guidelines for supervisors (BCBS 2020). With respect to banks, the guidelines cover (a) e ssential elements of sound ML/TF risk management; (b) customer acceptance policy; (c) identification, verification, and risk profiling of customers and beneficial owners; (d) ongoing monitoring; (e) management of information (including record keeping); (f) reporting of suspicious transactions; and (g) group-wide and cross-border risk management. These guidelines also require supervisors to implement a risk-based approach to AML/CFT supervision. 6
PREVENTING MONEY LAUNDERING AND TERRORIST FINANCING
