Why is business risk assessment crucial for effective AML compliance?

Financial criminals use different techniques to conduct money laundering. So, the first and foremost remedial action or foundation to fight these crimes is to identify and understand the risk sources.

AML Business Risk Assessment helps you identify money laundering/financing of terrorism (ML/FT) risks associated with products/services, geographies, customer base, etc.

Business Risk Assessment is critical to any company’s AML compliance programs. National and international AML laws mandate AML Business Risk Assessment.

First, let’s understand what Business Risk Assessment (AML BRA) is.

What is an AML Business Risk Assessment?

AML BRA is a process of identifying the threats of financial crimes to which a business is exposed. This procedure allows you to understand the areas of your business vulnerable to money laundering and other financial crime risks.

AML BRA helps you recognize these vulnerabilities to develop corrective actions to manage the risks effectively. Risk assessment helps you analyse the possibility of financial crime within or through your organization and potential impact on your operations.

AML BRA involves risk categorization and prioritization for better analysis. It helps the business to determine the resources, budget, and time required for risk mitigation, adopting the Risk-Based Approach.

The ML/FT risk exposure is not the same for every organization. It depends on the business size, nature of offerings, business model, geography, and other factors. Thus, you must consider all these points before conducting an AML BRA.

Now, we must understand why it is essential.

Why is business risk assessment important?

From a regulatory perspective, conducting AML Business Risk Assessment is mandatory under the Prevention of Money Laundering Act, 2002 (PMLA) to manage, control, and mitigate risks. AML risk assessment is essential for achieving 100% AML compliance.

AML BRA helps businesses to:

A. Identify the ML/FT risks your business is exposed to

Risk assessment includes exploring all possible risks a business may face due to several factors. It includes:

The risk associated with the nature, size, and complexity of the operations

Your business’s size and nature are vital indicators of potential ML/FT risks.

A business’s vulnerabilities increase with complicated processes, structures, and models. It is easier to launder illicit money when the business system has complicated procedures and controls.

Thus, you need to identify the risks related to your business’s nature, size, and complexity. After identification, you can take appropriate action and make yourself better equipped to manage these risks.

Risks your customers pose to your business

Customers pose different degrees and levels of ML/FT risks to a business. You need to assess your customers to identify their risks.

Be it an individual or an entity; you must assess them to detect any inherent risks. To assess the ML/FT risks arising out of customers, you must consider various parameters connected with the customer and their activities, such as:

  • Whether the customer is into cash-intensive business,
  • Whether the customer is a Politically Exposed Person (PEPs) or mentioned on the Sanctions Lists,
  • Nature of the business activities of the customer and their volumes,
  • Any negative mention of the customer in the media about financial crimes,
  • The source of funds and wealth of the customer,
  • Ownership structure and the customer’s beneficial owners (when it is a legal person).

Risks associated with your products, services, and transactions

The nature of the products and services you offer or transactions you conduct also helps determine the level of ML/FT risk you are vulnerable to. You must consider the following while assessing the ML/FT risk arising out of your own products/services or the nature of the transactions:

  • Linkage with the ML/FT typologies,
  • Where the product supports anonymity or the identity of the customer can be disguised,
  • Product allowing execution of multiple transactions without getting linked,
  • Involves high-value transactions,
  • Mode of payment, etc.

Financial criminals usually use products and services like financial services & instruments, insurance products, precious metals, lawyers’ services, etc., as a conduit to launder illicit money. So, these products or services are more likely to be exposed to money laundering threats.

AML BRA helps you identify the probability of these risks and determine what characteristics of a transaction are red flag indicators.

Geographical risks

The geographical risks of your business may come from your operating or customers’ locations.

Identifying the risks posed by jurisdiction is essential. Your risk assessment must also include finding the information about geographies (whether of your own or your customer’s), such as:

  • How much are the activities of corruption and bribery prevalent in the country?
  • Is it a terrorist country or supports/finances terrorism activities?
  • Is it a tax haven for many entities in other countries?
  • Is it involved in drug production, drug trafficking, or human trafficking?
  • Is it sanctioned by any of the countries or by UNSC?
  • Are there any border issues or bad relationships with neighbouring countries?

Delivery and payment channels and mediums of communication

Digital operations are the new trend. But the risk is high if the deliveries of the product/services are only virtual with no physical presence.

You must assess the risks associated with the following:

  • how your goods or services are delivered,
  • whether any intermediaries or agents are involved,
  • whether you meet your customers (physically or virtually or no meeting at all), etc.

B. Develop a risk-based approach to prevent financial crimes

With AML Business Risk Assessment, you identify the risks your business is facing or may face. You can categorize them into high, medium, and low. After this, you can develop a solid approach to mitigate or manage these risks using the available resources.

Thus, AML BRA is vital to develop a proactive risk-based approach to fight money laundering. Since you categorize the risks, you can develop immediate plans for high risks areas, focusing the resources to manage these risks on a priority basis. Once you tackle high-risk with the adequate deployment of the resources, you can manage the medium and low risks.

With the risk-based approach, you can take action to prevent it altogether. It gives you more flexibility, orientation, and adaptability to respond to risks without unnecessarily bogging down the medium or low-risk customers with increased scrutiny.

C. Build a sound AML framework to reduce the risks of money laundering

With the knowledge of business risks, you can develop a framework to protect your operations from identified ML/FT risks rather than adopting a “one-size-fits-all” method. It also helps you comply with AML regulations, avoiding penalties and fines.

You can customize this framework to the identified and assessed risks. It includes policies, procedures, models, internal controls, and systems to fight these risks.

You can develop appropriate policies to prevent the risk occurrence or reduce their impact. You can put in place control procedures as per the risk level. You can even implement technologies and systems to generate alerts of financial crimes.

Thus, business risk assessment helps you develop an effective AML framework to spot and avert money laundering.

D. Make more informed decisions about its operations

AML Business Risk Assessment gives you an idea of your exposure to different types of risks. Thus, you know what can harm your operations. You are better aware of factors that can stand in the way of your goal achievement.

This risk awareness helps you decide on process improvement, strategic actions, and solution implementation. It allows you to decide what customers to onboard and maintain business relationships with. You can also plan your geographical expansion, simplify your processes, and optimize delivery channels.

Thus, AML BRA makes you well-equipped to make strategic decisions. You become responsive to the potential risks with full-proof plans for each. Thus, you can make effective decisions to reduce risk occurrence, achieve AML compliance, and avoid fines.

How can AML India help in your AML Business Risk Assessment?

AML Business Risk Assessment helps you take proportionate measures to detect and prevent money laundering threats effectively. It ensures you make efforts to track, mitigate, and manage risks. It gives your AML efforts a direction, so you don’t waste resources on non-impactful controls.

And this is where an AML consultant like AML India can help. AML India is a leading provider of AML consulting services to achieve 100% compliance with AML regulations in India.

We undertake a comprehensive approach to make our clients AML compliant, from assessing ML/FT risks to developing an AML framework, conducting AML training, and managing KYC and CDD. Our deep-dive methodology in your business-specific AML compliance strategy delivers more impactful results.

About the Author

Pathik Shah


Pathik is a Chartered Accountant with more than 25 years of experience in compliance management, Anti-Money Laundering, tax consultancy, risk management, accounting, system audits, IT consultancy, and digital marketing.

He has extensive knowledge of local and international Anti-Money Laundering rules and regulations. He helps companies with end-to-end AML compliance services, from understanding the AML business-specific risk to implementing the robust AML Compliance framework.