In the modern financial world, it’s more important than ever for institutions to have effective processes for fighting financial crime. Stricter regulations and laws alongside new methods from criminals have added increased pressure on the need for effective anti-money laundering processes, and a critical part is AML risk management. 

This involves identifying, assessing and mitigating risks in an attempt to prevent money laundering and financial terrorism. Whether you’re a crypto company or a banking firm, understanding AML risk management is essential to the safety of your business and to ensure you stay compliant with AML laws. 

Ensure your AML strategy is effective with our streamlined AML solution software at SmartSearch.

What Is AML Risk Management?

Anti Money Laundering risk management refers to the processes used to identify, prevent and detect financial crime before it damages your customers, business or violates money laundering laws. 

AML risk management involves:

• Investigating customers, transactions and locations to identify any potential risks.
• Assess the level and impact of these risks.
• Implementing procedures and controls to prevent fraud and further risk.
• Monitor accounts and customers for further red flags.
• Escalate risks using the correct procedures.
• Reviewing AML risk procedures as they continue to evolve.

Risk management is a continuous process and regularly changes as new information and financial crimes evolve. 

Why is AML Risk Management Needed?

Compliance

All financial firms are required by law to have AML processes in place to comply with the 2017 Money Laundering Act, alongside other regulations. Some of the UK authorities include the Financial Conduct Authority and HMRC.

The government has set a number of penalties to encourage compliance with anti-money laundering regulations. Some of these include:

• Fines
• Criminal charges
• Reputational damage
• Business restrictions 

Compliance is not only essential, but proof of effective AML compliance through detailed record keeping is also needed.

Protection

AML management isn’t just designed to ensure compliance; it’s also an important tool that helps protect your business. Without strong risk management procedures, your business can be exposed to a number of threats, including:

• Financial terrorism
• Fraud
• Money laundering
• Corruption
• Financial theft

Maintaining company image

If your company becomes associated with financial crime or breaches in financial security, this can lead to significant reputation damage and reduce the amount of trust customers have in your services. In order to ensure the success of your business and maintain a positive image, a strong AML system is essential. 

The main components of AML risk management

Firm-Wide Risk Assessment

FWRA refers to the process of regularly reviewing risks across your entire business to identify potential risk or threat of exposure to financial crime, money laundering or sanctions. Key factors to evaluate include: 

• Customers - including PEPs and high-risk clients
• Services - Any crypto services, banking or accounting services
• Geographies - High-risk jurisdictions or countries with sanctions
• Transactions - Customer transactions, high velocity transactions, etc.

Each one of these aspects is assessed, and the level of risk is determined.

Customer Due Diligence (CDD)

Customer Due Diligence is a requirement for any UK financial institution and is the process of assessing customers before onboarding. These checks include:

• Identifying and verifying the identity of customers
• Identifying the purpose of a relationship, e.g the purpose of using your services
• Assessing the source of funds or wealth for higher-risk customers
• Organise frequent reviews

Ongoing Monitoring

Ongoing monitoring is the process of regularly reviewing customers to assess if their risk status changes. The monitoring process can be automated by advanced AI software and can be as frequent as needed in relation to the risk level of a customer. The process includes:

• Monitoring transactions 
• Customer behaviour
• Unusual activity or transactions
• Automated alerts for status change or suspicious activity

Sanction and watchlist screening

Screening is essential for all customers during the onboarding process and involves screening customers against global watchlists, including the Dow Jones watchlist. Customers on these lists have been identified as Politically Exposed Persons (PEPs), Relatives and Close Associates (RCAs) or Special Interest Persons (SIPs) and are at greater risk of association or exposure to financial crime. 

Anyone identified on these lists will need enhanced due diligence investigations or can even be rejected during the application process. 

Suspicious Activity Reports (SARs)

If a customer is suspected of money laundering or is flagged for any suspicious transactions, the next AML risk management procedure is to file a Suspicious Activity Report. This report includes all of your findings through your AML investigations and will be directed to senior management or the correct financial authorities for review. 

Regular training 

Criminals continue to evolve their methods of committing financial crime, whilst new technology and AML processes to fight money laundering are also regularly introduced. Because of the ever-evolving nature of this process, regular training is needed for all teams at financial institutions. Every company should appoint a dedicated AML officer, and staff at all levels should be educated on new regulations and the most effective ways to conduct AML checks.  

Maintaining detailed records

It’s not enough to just conduct AML checks; you need to keep detailed records to prove you’ve conducted these checks on your customers. All investigations need to be documented, including risk assessments and determined risk levels, transactional data and CDD documents. This not only makes regular reviews and audits easier, but it also protects your business should any financial authorities investigate your AML processes. 

How to carry out a risk-based AML strategy 

The most effective AML risk management strategies focus on carefully directing resources to areas with the biggest risk. Firms should be able to understand the specific risks posed by customers and clients and effectively redirect efforts based on the severity of the threat.

Any decisions made when conducting AML checks, such as deciding to conduct enhanced due diligence, should be documented with the reasoning for these decisions.  

Effective risk management with premium AML software

The most effective risk management strategies involve a mixture of manual and automated processes. In order to ensure no risk slips through the cracks, you need reliable software that can identify anomalies or suspicious activity in real time. 

With SmartSearch’s advanced AML software, you’ll have a strong line of defence against financial crime and will have all the tools you need to keep your customers and your business protected against fraud. 

To see what our amazing system can offer your company, request a free demo today or get in touch with our experts to learn more about our services.