AML/CTF Compliance Report: Here's How to Be Ready

The end of March is the time of year when AUSTRAC annual compliance reports are due in from reporting entities. Getting your report ready is not always a straightforward task, especially if your Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) program needs work.

We asked Anthony Quinn, CEO of the RegTech leader, Arctic Intelligence, for his advice on what organisations can do to improve their AML/CTF programs for ongoing compliance. He says the first and most crucial step is to consider the strength of your money laundering and terrorism financing (ML/TF) risk assessment. For reporting entities, it's a regulatory requirement for AML/CTF programs to be risk-based. The ML/TF risk assessment must be regularly reviewed and updated, specifically, if you're offering a new service or there are changes to your customers' circumstances.

"It's crucial that your risk assessment is accurate, up-to-date and thorough. Too often I see risk assessments that lack any cohesion with the AML/CTF program they are meant to underpin," says Quinn.

"The risk assessment is the foundation document for your entire AML/CTF program. If your organisation is grappling to understand the risks it faces from criminal exploitation, then it becomes that much harder to put together a worthwhile program to mitigate these risks."

An Arctic Intelligence survey of regulated entities across 12 industry sectors showed that 35% of respondents had not had an independent review of their AML/CTF program in the last 12 months. Gaps were particularly evident when it came to gauging ‘inherent risk’ – with 24% of respondents omitting this from the assessment altogether. Others failed to include an inherent risk assessment of channels by which customers accessed their services or countries in which customers were located.

Quinn explains that addressing inherent risk is vital for a balanced risk assessment. "Inherent risk is the risk an organisation faces in its normal course of business," he says. In other words, the risk that is present before any controls or mitigation measure is applied. Once inherent risk is determined, organisations can administer their AML/CTF controls and decide on their residual ML/TF risk.

Six ways to improve your risk assessment

So, what should a risk assessment look like? Quinn recommends organisations consider the following elements when developing ML/TF risk management processes.

1. Identify the main risk groups

Be aware that risk comes in various dimensions. Understand the nature, size and complexity of your organisation and build your risk assessment accordingly.

Cast a wide net and create a high-level list of the vulnerabilities and ML/TF risks you may reasonably expect to face in conducting your business. Think in terms of how criminals could use your organisation to facilitate money laundering or conceal the proceeds of crime. Your list must include the risk presented by the type of customers you have, the products and services you provide, the delivery channel transactions you offer and the markets you serve. A risk assessment matrix will help you narrow down the main risk groups by estimating the probability of occurrence and severity of impact if they occur.

2. Take a collective approach

Your efforts to reduce risk in one area might inadvertently increase risk in another. So it pays to consider whether there might be any interactions that could affect the assessment of risk. How does customer risk relate to product risk? Product risk relate to channel risk? Channel risk relate to geographic risk? So it goes on until you can quantify the broader threat of each composite part.

3. Establish controls

Unless you understand what controls to put in place to mitigate and manage your identified risks, then a risk assessment is little more than a theoretical exercise. Controls are programs, policies or activities that protect against the emergence of an ML/TF risk. They're also used to maintain compliance and ensure the prompt identification of potential risks.

Controls in your organisation might include employee screening, Know Your Customer (KYC), management oversight, risk profiling of business relationships and an AML/CTF training program. Be sure to evaluate these internal controls to determine how effectively they offset the overall risks.

4. Integrate with risk appetite

Risk is inevitable in the pursuit of business goals, but how much risk is your organisation willing to accept? Know whether the ML/TF risks identified in the risk assessment align with your organisation's appetite for risk. Only then can you be comfortable with the level of risk that is un-mitigated or recognise when to take action to increase your controls or diminish your exposure to risk in some areas.

If you don't understand the risk profile of your business, then any procedures or controls you put into place could be inappropriate and disproportionate to the risks your organisation faces.

5. Explain your processes

Be ready to defend your assessment of the ML/TF risk to auditors, senior management and the board. Document the methodology used, the risk factors considered, and how the risk factors relate to each other. Articulate the rationale for forming the views around the risk profile of your business and ensure quantitative judgement forms the basis of your findings.

6. Be alert to bad advice

If you're turning to a consultant for AML/CTF advice, be sure to select carefully. Look for specialist anti-money laundering experience, knowledge and qualifications. Question how familiar they are with regulatory compliance obligations and industry best practices in fraud, compliance, financial crime and anti-money laundering. Ask about their experience in identifying systemic vulnerabilities, procedural weaknesses or inadequacies in risk awareness training.  

Data analytics offers organisations a clear path to fast, effective and cost-efficient AML compliance. Contact Equifax to find out how our analytical tools and scalable solutions can assist you across the AML lifecycle.

For help with compiling an ML/TF risk assessment, the Arctic Intelligence risk assessment platform guides you through the process step-by-step, including how to construct a risk framework integrating the different aspects of organisational risk.