INTERNATIONAL STANDARDS FOR RISK-BASED SUPERVISION Financial Action Task Force (FATF) Recommendation 1 sets out the overarching risk-based requirements for jurisdictions, including financial institutions and their supervisors. Paragraph 9 of the interpretive note to Recommendation 1 requires supervisors to review the money-laundering and terrorism financing (ML/TF) risk profiles and risk assessments prepared by financial institutions and to consider the results of this review in their supervision. With respect to financial institutions, part B of this interpretive note details the obligations and decisions in assessing ML/TF risks as well as the weapons proliferation financing risks. Immediate Outcome (IO) 3 establishes the requirements for supervisors to supervise, monitor, and regulate financial institutions appropriately for compliance with anti-money-laundering and combating the financing of terrorism (AML/CFT) requirements commensurate with their risks, and IO 4 sets out the obligations for financial institutions to apply AML/CFT preventive measures commensurate with their risks and to report suspicious transactions. In summary, these standards require financial institutions and supervisors to identify, assess, and understand the ML/TF risks and to apply proportionate risk mitigation and supervisory measures, respectively. Where risks are higher, mitigation and supervision should be enhanced, and where risks are lower, less rigorous measures may be applied. This principle also implies that where the risks are at a normal level (neither high nor low), the standard measures described in the recommendations apply.
Outcomes from FATF Evaluations with Respect to Supervision The FATF recommendations set the standard for an effective risk-based AML/CFT supervisory approach. Recommendation 26 and IO 3 set out the main requirements for applying effective riskbased AML/CFT supervision to financial institutions. As of November 2021, the FATF had published the mutual evaluation reports and followup reports of 119 jurisdictions.1 Of these 119 jurisdictions, 30 are members of the FATF2 and 89 are members of an FATF-style regional body (FSRB). Members of FSRBs are largely developing jurisdictions. Jurisdictions have so far had mixed results from the assessment of compliance with Recommendation 26. As shown on figure 3.1, 87 percent of the assessed FATF members are largely compliant or compliant with this recommendation. In contrast, only 61 percent of the assessed FSRB members are largely compliant or compliant; 39 percent are partially compliant or noncompliant.
CHAPTER 3: INTRODUCTION TO A RISK-BASED AML/CFT SUPERVISORY FRAMEWORK
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