Strengthening the anti-money laundering programme through institutional risk assessments

The Reserve Bank of India (RBI) has advised banks and financial institutions (FIs) to adopt a risk-based approach (RBA) while designing the anti-money laundering (AML) and combating the financing of terrorism (CFT) programme. 

One of the fundamental elements in implementing an RBA is institutional risk assessment (IRA). This enables banks and FIs to understand how and to what extent they are vulnerable to ML/TF risks and helps in the judicious and efficient allocation of resources to create a robust AML and CFT compliance programme.

On 20 April 2020, the RBI mandated banks and FIs to carry out ‘ML and TF Risk Assessment’. As a part of the assessment, banks and FIs are required to carry out an ‘ML and TF Risk Assessment’ exercise regularly. The exercise will help banks and FIs identify, assess, and take effective measures to mitigate money laundering and terrorist financing risks for clients, countries, or geographical areas, products, services, transactions, delivery channels, etc. The assessment process needs to consider the relevant risk factors before determining the overall risk level, and appropriate mitigation level and type. As part of this exercise, the first internal risk assessment would need to be completed by 30 June 2020 and thereafter, reviewed periodically.

Historically banks and FIs have undertaken risk assessments as part of their enterprise or operational risk assessment. However, these are not specific to AML and CFT. Sometimes, risk ratings/assessments conducted as part of the AML compliance programme are often confused with institutional risk assessment.

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