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23rd December 2021

 

Financial Action Task Force (FATF) recently discussed the re-balancing of the risk-based approach for financial institutions to fight against money laundering and terror finance. FATF refers to de-risking as a process taken by financial institutions to neutralize the risk possessed by a client or an entity using a risk-based approach. Client or entity not resolved or obliged with the ML/TF laws are more exposed toward operating high-risk actions. It increases the scenario of money laundering and terror financing. 

 

The FATF Recommendations only require financial institutions to terminate customer relationships on a case-by-case basis where customer possesses high risk. On the other hand, cutting loose of entire classes of customers, without taking into account, seriously and comprehensively, their level of risk or risk mitigation measures for individual customers within a particular sector, goes against anti-money laundering/ counter-terrorism funding obligations.

 

In the light of recent events, EBA has introduced new guidelines requiring firms to adopt sensitive measures on clients that are high risk or serve under a low-income scale. EBA discussed the regulation for entities, businesses, and non-profit organizations could increase the effectiveness to fight ML/TF. 

 

As part of this, firms should put in place appropriate and risk-sensitive policies and procedures to ensure that their approach to applying CDD measures does not result in unduly denying legitimate customers access to financial services. 

  1. Adjusting the level and intensity of monitoring in a way that is to the ML/TF risk associated with the customer, including the risk that a customer who may have provided a weaker form of identity documentation may not be who they claim to be; and,
  2. Restricting the abuse of financial products or services by regulating and de-risking the financial product. Such products and services may also make it easier for firms to identify unusual transactions or patterns of transactions, including the unintended use of the product; but any limits must be proportionate and do not unreasonably or unnecessarily limit customer access to financial products and services.

FATF requests the firms to use a risk-based approach and perform complete customer due diligence to neutralize the risk of money laundering. 

 

Source: Mondaq

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