Understanding the Concept of De-Risking
In the realm of financial institutions, the focus has shifted towards a risk-based approach to AML compliance, as encouraged by regulators and international organizations. This approach aims to prevent the practice of de-risking, which involves terminating or restricting business relationships with clients or categories of clients to avoid risk.
De-risking can take various forms, such as selective client onboarding, product and service limitations, termination of relations, geographic restrictions, and continuous monitoring with periodic reviews and verification checks. However, it's essential to note that de-risking may not necessarily eliminate underlying AML risk, as it could drive illicit financial activities further underground.
To effectively manage and reduce operational risks, best practices for de-risking involve a systematic approach focused on identifying, prioritizing, and mitigating the highest risks. Key practices include:
- Centralized risk and vendor inventory management: Maintain a comprehensive list of third parties or risk sources, categorizing them by criticality and risk level to streamline control efforts.
- Prioritize risk assessment: Evaluate inherent risks by considering factors such as geography, regulatory exposure, and system access to identify which elements pose the greatest threat.
- Implement controls based on risk priority: Apply stronger controls, policies, and procedures to higher-risk activities, while using simplified measures for lower risks, enabling efficient resource allocation.
- Conduct thorough due diligence: Collaborate across risk and compliance teams to collect necessary documentation and perform detailed risk reviews and assessments before engagement.
- Ongoing monitoring and reassessment: Continuously monitor risk sources and third parties, reassessing periodically to identify changes or emerging risks, and adapt mitigation strategies accordingly.
- Incident and issue management: Establish escalation protocols to quickly resolve problems and minimize impact, ensuring business continuity and regulatory compliance.
- Proper offboarding: Securely terminate relationships when risks or contracts end, ensuring data retrieval and access revocation.
- Engage experienced professionals when necessary: For industry-specific risk areas, use consultants to interpret audits and implement necessary changes to reduce insurance and operational risks.
This approach aligns with regulatory recommendations and helps avoid ineffective or inappropriate de-risking behavior by focusing efforts where they matter most. It also reduces disruptions from investigations, compliance failures, or insurance complications, preserving business partnerships and reputation.
It's crucial to remember that de-risking can lead to financial exclusion of legitimate businesses and individuals, especially in higher-risk regions. To mitigate this, enhanced due diligence procedures for higher-risk customers or transactions can be implemented.
For a more in-depth understanding, we recommend the Anti-Money Laundering (AML) Policy: Step-by-Step Guide (with Template). This guide provides valuable insights into best practices for de-risking, including implementing face authentication checks, extra identity and address verification layers, coupling source of funds questionnaires and business verification, using behavior pattern monitoring and analysis tools, workflow automation, and bank account or credit card verification.
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