Conducting an ML/TF Risk Assessment: A Quick Ready Reckoner
An effective ML/TF Risk Assessment involves nine key steps, starting with preparing your Board's Risk Appetite Statement and documenting your methodology. It proceeds through inherent and residual risk assessments, testing controls, mapping residual risk to appetite, creating action plans for out-of-appetite risks, establishing Key Risk Indicators, and finally, updating your Transaction Monitoring Program rules and training.
Conducting an effective Money Laundering/Terrorism Financing (ML/TF) Risk Assessment begins with foundational governance elements that define a reporting entity's risk boundaries.
Steps for an ML/TF Risk Assessment
Prepare Your Board's Risk Appetite Statement (RAS): This document sets out how the Board views ML/TF risk and the level of risk it is willing to accept.
Document Your Methodology: Outline how you will conduct your ML/TF Risk Assessment (RAM), including the reporting entity's context, approach, sources of risk, control evaluation methods, and how residual risk will be determined. These steps ensure the assessment is strategic and methodologically sound.
Complete Your ML/TF Inherent Risk Assessment: Identify and assess the raw exposure to ML/TF risks before considering any controls. This involves evaluating risk factors such as products and services, customer types, geographic locations, and delivery channels. Other factors can also be included.
Test the Design and Operating Effectiveness of Your Controls: Determine whether existing controls are robust and functioning as intended.
Complete your ML/TF Residual Risk Assessment: This reflects the risk that remains after controls have been applied, using the results from the control testing.
Map your Residual Risk to your Risk Appetite: Compare your residual risks against your stated risk appetite to see if they fall inside or outside acceptable levels.
Create Action Plans: If risks fall outside of appetite, develop tailored action plans to mitigate them and bring them back within acceptable levels. The Board or governing body should be kept informed of progress.
Create Key Risk Indicators (KRIs): Align KRIs to your most material risks to provide clear, data-driven reporting for senior management and the Board, ensuring sustained oversight.
Update your Transaction Monitoring Program (TMP) Rules and Training: Reflect the findings and lessons learned from the risk assessment to ensure continuous alignment of operational controls with evolving risks.
Conclusion
Conducting an effective ML/TF Risk Assessment is crucial for reporting entities to define risk boundaries and ensure their controls are aligned with evolving risks.