Doing a BSA/AML risk assessment is a significant step in complying with anti-money laundering regulations. In this post, we’ll give you an overview of the risk assessment process for FIs. You’ll also understand the steps in completing a comprehensive BSA/AML risk assessment and how each step ensures your institution’s risk compliance with BSA/AML.
What is BSA/AML Risk Assessment?
BSA/AML Risk Assessment is a compliance tool that helps FIs identify, assess and reduce risks associated with money laundering, terrorist financing, or regulatory noncompliance. It also helps them determine if they should adopt new policies or processes to protect themselves from losses related to identified risks.
Step 1: Identify Your Risk Categories
The first step in the risk assessment process is identifying all business operations that could lead to money laundering and terrorist financing risk. By identifying the following risk factors, you can better understand which areas need to be assessed more deeply to determine an effective BSA/AML program.
a. Customer risk factors
This is where you identify the customer types that pose higher or lower money laundering or terrorist financing risks. It could be high-net-worth individuals, politically exposed persons (PEPs), PEP family members, foreign business travellers and new customers with little record information.
b. Product, services and transaction risk factors
Identify products or services that lend themselves to being misused for money laundering. You should list examples of suspicious transactions related to these products or services (e.g., a cash deposit through an automated teller machine in small amounts). Also, note if there are particular areas in which your financial institution may be more vulnerable than others because of the nature of its operation (e.g., currency exchanges).
c. Delivery channel risk factors
Review how internal controls operate across all delivery channels customers use to access accounts at your institution (e.g., internet banking). If you find that different channels have significant differences in controlling their control, consider whether this deserves additional monitoring activities.
d. Geographical risk factors
Identify geographic areas where you may face increased risks due to geopolitical instability, civil unrest (including terrorism) or corruption issues related to situations within governments/regimes.
Step 2: Analyze The Information Collected About The Risk Categories
The next step in completing your risk assessment is to analyze the information collected to identify potential risks and vulnerabilities. The risk analysis process involves identifying:
- The areas of your business are most at risk of being exploited by criminal activity.
- How likely will the occurrence happen?
- How severe the impact would be if such an event were to occur
Step 3: Identify Your ML/TF Controls
Once you’ve identified and analyzed your financial institution’s risk profile, it’s time to determine the money laundering and terrorist financing (ML/TF) controls that should be implemented to address those risks. To do this, you’ll first need to determine which of your existing controls are adequate and monitor them for effectiveness. You’ll also need to update these controls based on changes in your business or new regulations from external sources.
You should also consider reviewing the technology solutions used by your institution to identify if they are vulnerable to ML/TF risks.
Step 3: Implement New or Enhanced Controls
At this point, you should already have a good idea of your existing risk profile and what steps you need to take to mitigate the risks. The next step is to implement new or enhanced controls.
To ensure that all processes and procedures are followed as intended, new or enhanced controls should be documented and tested before they are implemented. They should also be reviewed regularly to ensure that they remain effective. If a change occurs within your organization (new vendors, partnerships, or previous partners), it is essential to adjust your BSA/AML policies accordingly so that all business relationships align with regulations.
Step 5: Create A Residual Risk Assessment Report
As you work through the steps of your risk assessment plan, you will continue to collect information and identify the key risk factors that may impact your institution. You will also identify controls to mitigate these risks and determine how effective these controls are at mitigating that risk.
Once all this data has been gathered and analyzed, it’s time to put everything together into a report. Next, the report should be shared with management or board members who may have questions about what was discovered during the process. The next step is documenting the information in your report as a BSA/AML control framework or matrix.
Step 6: Create a BSA/AML Compliance Program Based on the BSA/AML Risk Assessment
The BSA/AML risk assessment should be the foundation for developing a comprehensive compliance program. Depending on the size of your financial institution and its risk profile, you may have many obligations to comply with. First, prepare yourself by identifying all applicable regulations, such as OFAC and Patriot Act, and other laws that could apply to your business. Then, determine where you are at risk based on what has been assessed in the risk assessment report and develop a plan to address those risks and vulnerabilities going forward.
Although your compliance program should be designed to address what was identified through the risk assessment report, it should also be flexible enough to adapt over time if new questions arise or new risks emerge. As such, make sure that someone within your organization reviews this compliance program regularly so that necessary updates can be made accordingly.
Step 7: Update Monitoring Procedures to Verify Continued Compliance with BSA/AML Standards
The final step in completing a risk assessment is updating your monitoring procedures to verify continued compliance with AML/BSA standards. To do this, you’ll want to employ a risk-based approach that considers key risk factors mentioned in Step This includes:
- The size and nature of your institution’s business activities
- The types of customers you serve (e.g., private individuals, corporations)
- Geographic location(s) where your institution conducts business
It would help if you also considered how these factors have changed since the last time you conducted an AML/BSA review. An excellent way to accomplish this is by doing periodic tests on sample customer files or transactions to compare them against current policies and procedures.
While the above steps are designed to give you a general understanding of how to complete your BSA/AML risk assessment, they are not exhaustive. However, we offer a custom Risk-Based Anti-Money Laundering (BSA/AML) compliance program designed to detect and report potentially suspicious transactions for financial institutions while helping you comply with the 5 Pillars of the BSA/AML Program.