Guidance for applying a Risk-Based Approach to AML/CFT Supervision
4 March 2021 – Supervisors play a crucial role in preventing money laundering and terrorist financing. They ensure banks, other financial institutions, virtual asset service providers, accountants, real estate agents, dealers in precious metals and stones, and other designated non-financial businesses and professions, understand the risks facing their business and how to mitigate them. Effective supervisors also ensure that these businesses comply with their anti-money laundering and counter-terrorist financing obligations and take appropriate action if they fail to do so.
FATF encourages countries to move beyond a tick-box approach in monitoring the private sector’s efforts to curb money laundering and terrorist financing. FATF Guidance for a Risk-Based Approach Guidance to Supervision helps supervisors address the full spectrum of risks and focus resources where the risks are highest. A risk-based approach is less burdensome on lower risk sectors or activities, which is critical for maintaining or increasing financial inclusion.
Transitioning from rules-based supervision to risk-based supervision takes time and can be challenging. It requires a change in supervisory culture. Supervisors need to work across government and with the private sector to develop an in-depth understanding of the risks that their regulated entities face. This is important because every business operates differently and faces different risks. Supervisors need to have appropriate powers, skills and resources as well as political and organisational support. They need to continuously update their understanding of risk and adjust and improve their supervisory approach.
The guidance is composed of three parts:
- Part 1 – The high-level guidance on risk-based supervision, which explains how supervisors should assess the risks their supervised sectors face and prioritise their activities, in line with the FATF Standards’ risk-based approach.
- Part 2 – Strategies to address common challenges in risk-based supervision & jurisdictional examples, including examples of strategies for supervising non-financial businesses and professions and virtual asset service providers.
- Part 3 – Country examples from across the global network, of supervision of the financial sector, virtual asset service providers and other private sector entities.
The risk-based approach will make supervisors efforts to detect and prevent the financial flows that fuel crime and terrorism more effective. This is crucial, because it is better to detect and prevent money laundering and terrorist financing than to prosecute it after a crime has occurred.
The guidance has benefitted from extensive input by the FATF Global Network of FATF Members and FATF-Style Regional Bodies, a total of 205 jurisdictions, and informal consultation with private sector representative bodies and financial inclusion stakeholders.