On 4 March 2021, the Financial Action Taskforce (FATF) issued guidance (Guidance) on risk-based supervision for financial intelligence units and other supervisors covering the assessment of risks in the sectors they oversee and commentary on adapting their resources.
The Guidance notes that Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) supervisors play an essential role in protecting the financial system and other sectors from misuse by criminals and terrorists by:
- Increasing regulated entities’ awareness and understanding of underlying risks and setting regulatory obligations and encouraging good practices
- Enforcing and monitoring compliance with AML/CFT obligations
- Taking appropriate measures where deficiencies are identified
The Guidance also comments that a risk-based approach should involve tailoring the supervisory response to fit the assessed risks, allowing supervisors to allocate finite resources to effectively mitigate the ML/TF risks they have identified as aligned with national priorities. Tailoring supervision to address the relevant ML/TF risks improves the quality of information available to law enforcement authorities and will reduce the opportunities for criminals to launder their illicit proceeds and terrorists to finance their operations. Implemented properly, a risk-based approach is more responsive, less burdensome and delegates more decisions to the people best placed to make them.
The transition from a rule-based to a risk-based approach takes time, requiring a change in supervisory culture, investment in skills and resources, in addition to the development and implementation of a comprehensive supervisory toolkit. To assist in this exercise, the FATF has set out high-level guidance in Part One of the Guidance, practical advice to address common implementation challenges in Part Two and country examples in Part Three, including strategies and examples of supervision of Designated Non-Financial Business and Professions and Virtual Asset Service Providers.
The objective of the non-binding Guidance is to clarify and explain how supervisors should apply a risk-based approach to their activities in line with the FATF Standards. In addition to explaining common expectations, the Guidance is also forward looking and identifies innovative practices that can help improve the effectiveness of AML/CFT supervision and thus the overall AML/CFT system.
FATF’s Guidance can be found here.