Risk-based approach: is it the answer to effective anti-money laundering compliance?

Aims and introduction

The risk-based approach (RBA) is fundamental to anti-money laundering (AML) compliance in the United Kingdom and requires all parties in the fight against money laundering (including law enforcement, government departments, regulators, and industry) to focus on outputs. Such a focus should mean that AML resources are applied where they have the biggest impact and where the risk is the greatest.[1] Whilst the EU Fourth Money Laundering Directive[2] and the UK Money Laundering Regulations[3] place an increased emphasis on the RBA, this chapter argues that it is crucial to take a step back and assess the effectiveness of the approach. The objective of this chapter is to consider whether the RBA as currently implemented in the AML regime leads to more effective AML compliance. The chapter further argues that the RBA is both undefined and unguided. The arguments follow a dual path: first, the concept of‘risk’ in the AML context is questioned. Second, the contradiction between how the legal requirements define the RBA and how the Financial Conduct Authority (FCA) seeks to implement it is analysed. Effectiveness in the context of applying the RBA would entail minimum wasted effort or expense on the part of regulated entities and maximum utilisation of suspicious activity reports on the part of law enforcement. This would also translate into a more proportionate AML regime.

Banks and financial institutions as primary AML compliance partners are the key focus of this chapter. The rationale for this focus is based on the numbers - between April 2017 and March 2018, banks accounted for over 80% of the 463,938

Risk-based approach 53 suspicious activity reports (SARs) submitted to the National Crime Agency (NCA).[4] Adding together the percentages of SARs from all other types of credit or financial institutions brings this figure to 96.45%.[5] Overwhelmingly, the financial sector clearly bears the greatest burden of compliance. The NCA as the Financial Intelligence Unit and the FCA as the UK Financial Regulator are key players in the compliance regime and hence their relationship with banks and financial institutions will also be discussed.

  • [1] Financial Conduct Authority, ‘Money Laundering and Terrorist Financing’ (, 3 August 2015).
  • [2] Council Directive 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, amending Regulation 648/2012 and repealing Directive 2005/60 and Commission Directive 2006/70 [2015] OJ L141/73 (4MLD). The 4MLD is transposed into national law by way of the 2017 Money Laundering Regulations.
  • [3] Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, SI 2017/692.
  • [4] NCA, Suspicious Activity Reports (SARs) Annual Report 2018 (2018).
  • [5] Ibid.
 
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