Identifying and managing low money laundering risk

TLDR

Low‑risk products and transactions are often overlooked by the risk‑based approach, yet they are essential for expanding financial inclusion. This study examines FATF’s risk‑based guidance to determine how low‑risk providers, products, and transactions are identified and managed. The authors analyze FATF recommendations and guidance notes, raising key questions for regulators and financial institutions. The paper finds that FATF does not define risk, complicating low‑risk identification; its example risk matrix relies on unsustainable assumptions, and it labels low‑value transactions as low risk, prompting suggestions to clarify the conceptual framework and address identified gaps.

Abstract

Purpose The purpose of this paper is to investigate Financial Action Task Force (FATF)'s risk‐based guidance to combat money laundering and terrorist financing to determine its approach to the identification and management of low‐risk providers, products and transactions. Design/methodology/approach The paper analyses the relevant FATF recommendations and its guidance notes and reflects on key questions for regulators and financial institutions. Findings FATF has not defined “risk” for purposes of the risk‐based approach. The absence of a clear definition complicates the identification of low‐risk products. FATF do provide an example of a risk matrix that can be used to identify low‐risk banks, but the example is based on assumptions and generalisations that are not sustainable. In addition, it identifies certain low‐value transactions as “low risk” transactions. The paper reflects on the role of value as an indicator of risk and concludes with a number of suggestions to clarify the conceptual framework. Originality/value Low‐risk products and transactions are often overlooked because the risk‐based approach focuses attention on high‐risk matters. Low‐risk products are however crucial to the efforts to increase financial inclusion. The paper identifies gaps in the current conceptual framework and indicates ways in which they can be addressed.