MLD4 consultation papers on guidelines on risk-based supervision and risk factors 

On 21 October 2015, the Joint Committee of the European Supervisory Authorities (ESAs) published two consultation papers on guidelines required under the Fourth Money Laundering Directive (MLD4). Both consultations close on 22 January 2016 and a public hearing will be held on 15 December 2015. The guidelines will hopefully be finalised in spring 2016 and will be updated as necessary.

  • Consultation paper on the risk-based supervision guidelines  focuses on the characteristics of a risk-based approach to AML/ CTF supervision and the steps supervisors should take when conducting supervision on a risk-sensitive basis. The ESAs are required to issue the guidelines to competent authorities under Article 48(10) of MLD4. The aim is to create both a common understanding of risk-based supervision (RBS) and to establish consistent and effective supervisory practices across the EU, which comply with the FATF standards. RBS is characterised as an ongoing and cyclical process that includes four steps: identification of the money laundering (ML) and terrorist financing (TF) risk factors, the risk assessment (whereby competent authorities use this information to obtain a holistic view of the ML/TF risk associated with each credit or financial institution), the allocation of AML/CFT supervisory resource based on the risk assessment, and monitoring to ensure the risk assessment and associated allocation of supervisory resource remains up to date and appropriate. The guidelines build on a preliminary report published by the ESAs in October 2013.

MLD4 risk factors guidelines

  • Consultation paper on the risk factors guidelines covers simplified and enhanced customer due diligence and the factors credit and financial institutions should consider when assessing the AML/CFT risk associated with individual business relationships and occasional transactions. Title II of the guidelines is generic and applies to all credit and financial institutions. It is designed to equip firms with the tools they need to make informed, risk-based decisions when identifying, assessing and managing AML/CFT risk associated with individual business relationships or occasional transactions. Title III of the guidelines is sector specific. It sets out risk factors that are of particular importance in certain sectors, including retail banks, wealth management and life insurance undertakings, and provides guidance on the risk-sensitive application of customer due diligence measures by fi rms in those sectors. These guidelines issue under Article 17 and 18(4) of MLD4 in order to promote the development of a common understanding, by firms and competent authorities across the EU, of what the risk-based approach to AML/CFT entails and how it should be applied.

FATF update, de-risking, guidance on effective AML and CTF supervision and enforcement in financial services sector and report on emerging terrorist financing risks

On 23 October 2015, FATF published the outcomes from its October plenary meeting.

FATF published a statement on its action to tackle de-risking (where financial institutions terminate or restrict business relationships with categories of customer that they associate with higher money-laundering risk). This is a priority area for FATF as de-risking may drive financial transactions underground which creates financial exclusion and reduces transparency, thereby increasing money laundering and terrorist financing risks. De-risking is driven by many different factors, including a lower risk appetite of banks, the increasing number of sanctions regimes, and regulatory requirements in the financial sector. FATF aims (among other initiatives) to

  • develop guidance to clarify how to properly identify and manage risk in the context of correspondent banking and remittances. This guidance will address the issues highlighted by the FATF in its June 2015 statement on de-risking; and
  • develop best practices on appropriate customer due diligence to facilitate financial inclusion in a way that strikes an appropriate balance with AML/ CTF objectives.

FATF also published guidance on effective supervision and enforcement by AML/ CTF supervisors in the financial sector and law enforcement. This guidance sets out the features of effective supervision by regulators and supervisors, clarifies their interaction with law enforcement agencies,. describes good practices and provides illustrative case examples. It should be read in conjunction with its guidance on the risk-based approach.

FATF published a report on Emerging Terrorist Financing Risks with an analysis of both existing and emerging terrorist financing methods and risks. The report looks at:

  • financial management of terrorist organisations;
  • traditional terrorist financing methods and techniques; and
  • emerging terrorist financing threats and vulnerabilities.