Risk Based Approach

With the introduction of the Risk Based Approach as the overriding principle in the fight against financial crime, country risk has been identified as being one of the most important risk factors to consider when assessing the financial crime risk of any customer. It is an integral part of any customer due diligence and risk assessment process.

When assessing a customer’s risk profile, Financial Institutions, Designated Non-Financial Businesses and other Professions need to consider not only the financial crime risk related to the customer and the customer’s source of funds and wealth, but also the political landscape, legal frameworks, and their effectiveness, in the relevant countries associated with the customer.

There is no universally agreed definition by either competent authorities or financial institutions that prescribes whether a particular country or geographic area (including the country within which the institution operates) represents a higher risk. However, at the time of any risk assessment, the following criteria relating to jurisdictional risk should be determined: -

  • The customer's domicile and/or tax residency

  • The customer's nationality

  • The customer's principal countries of economic activity

The Three stages of Money Laundering

Assessing country risk is very much dependent upon the stage of the money laundering process i.e. the stage at where the funds are being placed, layered or integrated. Placement “Placement” is the term given to getting the proceeds of crime into the financial system. The beginning of the process of getting dirty money to look clean. Most “placement” activity would be done in cash – the proceeds for example from theft, or blackmail, extortion, bribery, corruption, drugs dealing. But some placement activity is already in the form of a financial instrument or credit of some sort, for example a corrupt payment might be placed into the receiving criminal’s bank account via a bank transfer from the criminal paying the bribe. At the placement stage, the criminal proceeds are usually processed relatively close to the under-lying activity; often , but not in every case, in the country where the funds originate. Layering “Layering” is the term given to moving the proceeds around within the financial system so that its origin becomes obscured. The idea is to fabricate some movements, which look legitimate, but serve to distance the money from the criminal – whilst of course, he still controls them. With the layering phase, the launderer might choose an offshore financial centre, a large regional business centre, or a world banking centre – any location that provides an adequate financial or business infrastructure. At this stage, the laundered funds may transit bank accounts at various locations without leaving traces of their source or ultimate destination. Integration The objective of placement and layering is to integrate the money so that it has become undetectable from legitimate funds and to enable the criminal to openly enjoy his illgotten gains with reduced risk of being caught or the funds being frozen by law enforcement. Typically criminals want integrated money to be in safe assets (such as property), reputable institutions and orderly jurisdictions. As a result, at the integration phase launderers might choose to invest laundered funds in still other locations if they were generated in unstable economies or locations offering limited investment opportunities.