National Risk Analysis (NRA)Framework
Understanding the money laundering and terrorist financing risks is an essential part of developing and implementing a national anti-money laundering / countering the financing of terrorism (AML/CFT) regime.
A risk assessment allows countries to identify, assess and understand its money laundering and terrorist financing risks. Once these risks are properly understood, countries can apply AML/CFT measures that correspond to the level of risk, in other words: the risk-based approach (RBA). The risk-based approach, which is central to the FATF Recommendations, enables countries to prioritise their resources and allocate them efficiently.
The
FATF has developed guidance which will assist countries in the conduct of risk
assessment at the country or national level
The FATF Standard: FATF recommendation 1 :
Countries
should identify, assess, and understand the money laundering and terrorist
financing risks for the country, and should take action, including designating
an authority or mechanism to coordinate actions to assess risks, and apply
resources, aimed at ensuring the risks are mitigated effectively. Based on that
assessment, countries should apply a risk-based approach (RBA) to ensure that
measures to prevent or mitigate money laundering and terrorist financing are
commensurate with the risks identified. This approach should be an essential
foundation to efficient allocation of resources across the anti-money
laundering and countering the financing of terrorism (AML/CFT) regime and the
implementation of risk-based measures throughout the FATF Recommendations.
Where countries identify higher risks, they should ensure that their AML/CFT
regime adequately addresses such risks. Where countries identify lower risks,
they may decide to allow simplified measures for some of the FATF Recommendations
under certain conditions. Countries should require financial institutions and
designated non-financial businesses and professions (DNFBPs) to identify,
assess and take effective action to mitigate their money laundering and
terrorist financing risks.
Identifying, assessing, and
understanding ML/TF risks is an essential part of the implementation and
development of a national AML/CFT system, which includes laws, regulations,
enforcement and other measures to mitigate ML/TF risks. It assists in the prioritisation
and efficient allocation of resources by authorities.
The results of a national risk
assessment, whatever its scope, can also provide useful information to
financial institutions and designated non-financial businesses and professions
(DNFBPs) to support the conduct of their own risk assessments. Once ML/TF risks
are properly understood, country authorities may apply AML/CFT measures in a
way that ensures they are commensurate with those risks –i.e,.the risk-based
approach (RBA)–which is central to the FATF standards as is set out in
Recommendation 1, its interpretive note (INR 1), as well as in other
Recommendations (e.g., Recommendations 10, 26 and 28).
Methodology
The terminology and methodology of the NRA are based in part on the guidance of the Financial Action Task Force (FATF), the international standard-setting body for AML/CFT safeguards. The following concepts are used in this risk assessment:
Threats: For purposes of the NRA, threats are the predicate crimes that are associated with money laundering. The environment in which predicate offences are committed and the proceeds of crime are generated is relevant to understanding why, in some cases, specific crimes are associated with specific money laundering methods.
Vulnerabilities: Vulnerabilities are what facilitate or create the opportunity for money laundering. They may relate to a specific financial sector or product or a weakness in law, regulation, supervision, or enforcement.
Consequences: Consequences include harms or costs inflicted upon citizens and the effect on the economy, which provide further context on the nature of the threats.
Risk: Risk is a function of
threat, vulnerability, and consequence. It represents an overall assessment,
taking into consideration the effect of mitigating measures including regulation,
supervision, and enforcement
Some examples of specific ML/TF risk events (derived from the threats, vulnerabilities and consequences) identified at this stage might include the following:
1. “Organised crime groups place proceeds of crime into the financial system through co-mingling cash with legitimate business takings.”
2. “Narcotics trafficking groups use cash smuggling to move illegal proceeds over the border.”
3. “Terrorist group X is known to raise funds via cash donations obtained within the country.”
4. “Foreign terrorist groups uses domestic NPOs as fronts for terrorist financing activities.”
5. “Foreign criminal groups launder foreign proceeds of crime in the country by investing in the domestic real estate sector.”
6. “Criminals and terrorists exploit the lack of information on beneficial ownership and control of companies to obscure or hide links between them and legal persons controlled or owned by them.”
7. “Terrorists / criminals move funds out of the country via informal money transfer businesses.”
8. “Financial institutions fail to identify suspicious transactions because of poor monitoring systems.”
9. “Law enforcement fails to investigate ML due to their focus on predicate crime only.”
10. “Launderers avoid conviction due to poorly drafted ML laws.”
11. “Law enforcement are unable to investigate some ML and TF cases due to poor information about beneficial ownership and control of companies used by launderers and financiers.”
12. “Confiscation of proceeds of crime fails because law enforcement fail to use provisional measures to freeze or seize assets during investigations.”
13. Another approach that may be used starts from a macro-level and tends to focus more on circumstances. Under this approach a list of risk factors (relating to threats and vulnerabilities, see Annexes I and II for some examples of risk factors) is identified for analysis. The list can be expanded or narrowed down depending on the scope of the ML/TF assessment.
Source: FATF
Determination of Size or Seriousness of the Risk
Having
considered the influence of the broad environmental factors on each identified
risk the analysis stage can move on to attempting to determine the size or
seriousness of each risk. Often this may mean determining the size or
seriousness of the risk in relative terms to other risks. This can be done by
using different techniques, for example:
1. If doing this holistically, those involved in the risk analysis might collectively rank or categorise each of the identified risks in terms of their degree and relative importance.
2. More formal analytical techniques can involve identifying the nature and extent of the consequences of each risk along with the likelihood that the risk may materialise and combining those results to determine a level of risk, which is often presented through the use of a matrix. The actual processes used to identify consequences and determine likelihood can also vary: Some countries may choose to employ more formal techniques such as surveys of experts or statistical analysis of the frequency of past ML or TF risk related activity. Others may choose to rely on the conclusions of a group discussion or workshop to help develop this information
Performance of Countries regarding
NRA
FATF data from
April 2022 show that only 11 countries, or 8.5 percent of those assessed, are
fully compliant with Recommendation 1 on “identifying, assessing and
understanding” money laundering risks. Three countries are fully non-compliant
— the DRC, Haiti and Madagascar — and the rest have significant room for
improvement.
Sadly, when it
comes to the effectiveness of countries’ efforts to assess ML/TF risks,
according to the FATF’s Immediate Outcomes, not even one country achieves the
highest mark. A quarter of countries are scored as having “negligible”
effectiveness, with the remaining 75 percent still requiring major improvements.
Here are some
common reasons for such a situation:
- A full NRA is not entirely conducted
or not approved by the authorities. The assessment is limited to several
industries.
- Several actors from the private or
public sectors do not participate in the assessment (real estate agents,
car dealers, lawyers, investigators, etc.).
- A risk-based approach is not applied.
This includes not having a mechanism to deal with high-risk situations or
to implement simplified procedures for low-risk situations.
- Financial institutions are not
required to document their risk assessments or update them. They may not
have appropriate mechanisms to share this information with relative
authorities.
- Results of the NRAs are not well
disseminated.
- The lack of data.
Issues with data availability
The availability of data and their quality may vary from
country to country. A 2022 World Bank report on NRAs in
eight advanced countries pointed out worryingly that “most NRAs relied on just
one or two data sources. The quality of the data sources was never
systematically assessed.”
The FATF
recommends not to rely exclusively on quantitative information but also include
qualitative information such as expert judgements, private-sector inputs, case
studies, typology studies, surveys and perception indexes. This is especially
important for “low-capacity countries with limited data on criminal
investigations or financial transactions.”
Perhaps due to difficulties in accessing data on terrorist financing, countries tend to underestimate their TF risks.
Unlike with the
identification of national hazard or disaster risks, the probability/likelihood
of ML/TF “events” is not a major factor. This is due to the specifics of
financial crimes and the inability to predict them reliably.
The FATF Mutual Evaluations
The FATF
conducts mutual evaluations of its members’ levels of implementation of the
FATF Recommendations on an ongoing basis. These are peer reviews, where members
from different countries assess another country. The FATF Methodology
for assessing compliance with the FATF Recommendations and the effectiveness of
AML/CFT systems sets out the evaluation process.
Assessments
focus on two areas, effectiveness and technical
compliance.
- The emphasis of any assessment is
on effectiveness. A country must demonstrate that, in
the context of the risks it is exposed to, it has an effective framework
to protect the financial system from abuse. The assessment team
will look at 11 key areas, or immediate outcomes, to determine the level
of effectiveness of a country's efforts.
- The assessment also looks at whether
a country has met all the technical requirements of each
of the 40 FATF Recommendations in its laws, regulations and other legal
instruments to combat money laundering, and the financing of terrorism and
proliferation.
A
mutual evaluation report provides an in-depth description and analysis of a
country’s system for preventing criminal abuse of the financial system as well
as focused recommendations to the country to further strengthen its system.
The
Methodology will be used by the FATF, the FATF-Style Regional Bodies (FSRBs)
and other assessment bodies such as the IMF and the World Bank. The
Methodology was adopted on 22 February 2013, and regularly updated; (see
also 'Information on updates made to the FATF Methodology').
Revision of the FATF Assessment Methodology
The FATF amended
its assessment methodology in 2022. The FATF commenced its 5th round of
evaluations under this amended methodology in 2024 and FATF-Style Regional
Bodies will also progressively use this methodology once they complete their
previous round of evaluations.
The 2013 FATF Methodology for assessing compliance with the FATF Recommendations and the effectiveness of AML/CFT systems and the Procedures for the FATF Fourth Round of AML/CFT Mutual Evaluations will continue to apply to countries being evaluated under the previous round of evaluations and related follow-up processes.
NRA — different methodologies
There is no single or universal methodology for conducting an NRA, as the recent World Bank analysis pointed out. The NRA framework within the overall FATF guidance has been developed by World Bank, IMF, The Basel AML Index, Wolfberg Group etc. in their quest for promoting AML/CFT processes in the interconnected global economy.
The World Bank, FATF and International Monetary Fund have
suggested several different guidelines, tools or principles for the evaluation
process.
Many countries use
the World Bank’s tool for conducting
an NRA. This consists of eight modules, covering
topics such as financial product risk and sectoral vulnerabilities. It replaces
an earlier NRA tool that used a matrix approach to assesses threats and
vulnerabilities in five different areas. The World Bank may provide technical
assistance for countries to launch an NRA.
The Basel AML Index, the Basel Institute’s tool for assessing ML/TF risks around the world, does not include NRAs as a standalone factor in ranking countries. This because FATF data — which already takes into account a country’s NRA — is a core element of the Basel AML Index methodology.
NRAs are, however,
the main basis of special reports on ML/TF risks in smaller jurisdictions
including Jersey, Guernsey, Isle of Man, Gibraltar and the Cayman Islands.
These are available to Expert Edition Plus subscribers. Expert Edition and
Expert Edition Plus subscriptions are free for most organisations outside the
private sector.
An example of National Risk Assessment of ML/TF risks faced by Israel is accessible on this link
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