Nearly a decade after the Financial Action Task Force (FATF) introduced requirements for National Risk Assessments (NRAs) of money laundering and terrorism financing (ML/TF) risks, the international community is at the right point to review the past 10 years and assess whether the risk-based approach to AML/CFT is developing as intended, according to the World Bank.
As a result, it has commissioned and published a landmark report that evaluates the quality of ML/TF risk assessments by eight countries and draws lessons to guide future risk assessments by analysing what is working, what is not working, and how a risk-based culture and operational focus can be bolstered.
The report is critical of several aspects of the NRAs it analysed, including the way data from suspicious activity reports (SARs) provided principally by retail banks is interpreted.
The FATF requires national governments to demonstrate an understanding of the ML/TF risks in the country that is the foundation for effective control of money laundering under the risk-based approach the global financial watchdog calls for.
The independent research by two distinguished academics, Joras Ferwerda and Peter Reuter, analyses eleven NRAs published by eight systemically important countries to test whether they demonstrate that basic understanding and to draw lessons for national governments from those assessments.
Serious methodological issues
The eight countries – Canada, Italy, Japan, the Netherlands, Singapore, Switzerland, the UK and the US – show very different conceptualisations, analytic approaches, and products according to the report, National Assessments of Money Laundering Risks: Learning from Eight Advanced Countries’ NRAs.
Each raises serious issues regarding the risk assessment methodology it concludes.
Misrepresented SARs data
For example, most relied largely on expert opinion, which they solicited in ways that are inconsistent with the well-developed methodology for making use of expert opinion, the report says.
They misinterpreted data from SARs and failed to provide risk assessments relevant for policy makers. Only one described the methodology employed it adds.
However, the researchers go on to say that their findings do point to ways to improve substantially on existing practices.
Suggestions for policymakers
The report concludes with a set of suggestions for international policy makers and those conducting NRAs for improving risk assessments.
Suggestions include increased clarity about the conceptualisation of risk, transparency about data and methods so that each country can learn from others, and the adoption of more formal and standardised methods of eliciting expert opinion.
The World Bank report, National Assessments of Money Laundering Risks: Learning from Eight Advanced Countries’ NRAs, can be found here.
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