Risk-Based Approach to AML Compliance for Gatekeeper Professions

Introduction

The Risk-Based Approach (RBA) to Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) compliance is fundamental to ensuring that gatekeeper professions such as lawyers, accountants, real estate agents and trust and company service providers (TCSPs) effectively mitigate money laundering and terrorism financing risks.

Unlike rigid, one-size-fits-all frameworks, the RBA allows gatekeepers to focus their resources on higher-risk clients, products and services, channels transactions, and jurisdiction, thereby improving compliance efficiency and outcomes. This blog provides a comprehensive framework for assessing and mitigating AML/CTF risks tailored to each profession, highlighting key challenges and best practices.

The principles of a risk-based approach

A risk-based approach involves three key steps:

1. Risk Assessment: Identifying potential risks related to clients, transactions, geographic locations, and services

2. Mitigation Strategies: Applying appropriate and proportionate control measures to address identified inherent risks

3. Ongoing Monitoring: Continuously reviewing client activities to detect changes in risk profiles or emerging threats

By prioritising high-risk areas, gatekeepers can ensure compliance measures are both effective and efficient.

Risk assessment framework for gatekeepers

Each gatekeeper profession faces unique risks based on their roles and services. Below is a tailored framework for assessing AML risks for lawyers, accountants, real estate agents, and TCSPs.

Lawyers

Lawyers are often involved in high-value financial transactions, corporate structuring, and trust management, making them susceptible to exploitation by money launderers.

• Risk Indicators:
  • Clients using legal services to create complex corporate structures without a clear business purpose
  • Requests for anonymity in transactions
  • Engagements involving high-risk jurisdictions

• Mitigation Strategies:
  • Conduct enhanced due diligence (EDD) for high-value or cross-border transactions
  • Verify ultimate beneficial ownership (UBO) of entities involved in legal transactions
  • Implement “red flag” training to identify suspicious behaviours, such as reluctance to provide documentation

Accountants

Accountants handle sensitive financial data and are often involved in structuring transactions, tax planning, and auditing, making them critical in detecting financial anomalies.

• Risk Indicators:
  • Clients insisting on cash-based transactions
  • Irregularities in financial statements, such as unexplained large transactions
  • Use of multiple offshore accounts with unclear purposes

• Mitigation Strategies:
  • Monitor client financial records for discrepancies or unusual patterns
  • Employ technology to automate anomaly detection in accounting systems
  • Perform detailed reviews of high-risk client accounts and transactions

Real Estate Agents

Real estate transactions are often used to launder large sums of money due to the high value and relative stability of real estate assets.

• Risk Indicators:
  • Purchases involving significant cash payments
  • Use of third parties or shell companies to purchase properties
  • Transactions involving politically exposed persons (PEPs)

• Mitigation Strategies:
  • Verify the source of funds for high-value property transactions
  • Conduct due diligence on buyers, sellers, and intermediaries
  • Report cash transactions exceeding jurisdictional thresholds to relevant authorities

Trust and Company Service Providers (TCSPs)

TCSPs facilitate the creation and management of corporate entities, trusts, and other structures that can obscure ownership or financial flows

• Risk Indicators:
  • Clients requesting nominee directors or shareholders to maintain anonymity
  • Frequent changes to corporate structures without clear rationale
  • Transactions involving high-risk jurisdictions or industries

• Mitigation Strategies:
  • Implement stringent UBO verification processes
  • Require detailed documentation of the business purpose for each entity created
  • Monitor ongoing activities of entities under management for deviations from declared purposes

Best practices for implementing the RBA

There are a number of best practices that gatekeepers should consider when implementing a risk-based approach including:

1. Adopt Tailored Policies and Procedures: Each profession should develop AML policies aligned with its unique risk profile and operational context. This includes guidelines for client onboarding, due diligence, and ongoing monitoring

2. Invest in Training: Regular training equips professionals with the knowledge to identify red flags and adapt to evolving risks. Training should include real-world scenarios to enhance understanding
3. Leverage Technology: Advanced tools such as AI-driven analytics, transaction monitoring systems, and blockchain-based verification solutions can enhance efficiency and accuracy in identifying risks

4. Collaboration with Regulators and FIUs: Gatekeepers should maintain open communication channels with regulatory bodies and Financial Intelligence Units (FIUs) to stay updated on emerging threats and compliance expectations

5. Implement Robust Record-Keeping: Maintaining comprehensive records of client information, transactions, and risk assessments ensures traceability and facilitates regulatory audits

6. Conduct Regular Audits: Internal and external audits of AML compliance programs help identify gaps and areas for improvement

Challenges in applying the RBA

Despite its advantages, implementing a Risk-Based Approach poses challenges:

• Subjectivity in Risk Assessments: Inconsistent criteria for evaluating risk can lead to gaps in compliance or overly burdensome measures
• Resource Limitations: Smaller firms may lack the tools or expertise to conduct thorough risk assessments and monitoring
• Balancing Efficiency and Compliance: Excessive focus on low-risk clients or transactions can divert resources from high-risk areas

Conclusion

The Risk-Based Approach to AML/CTF compliance empowers gatekeepers to focus their efforts on areas of greatest vulnerability, enhancing their ability to detect and prevent financial crimes. By tailoring risk assessments and mitigation strategies to the unique challenges of their profession, lawyers, accountants, real estate agents, and TCSPs can ensure effective compliance while optimizing resource allocation. While challenges persist, continuous training, technological innovation, and collaboration with regulatory authorities provide a path forward for gatekeepers to strengthen their defences against money laundering and terrorism financing.