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The Risk-Based Approach in the New European Anti-Money Laundering Legislation: A Law and Economics View
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2009
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European LawFinancial Crime PreventionLawCriminal LawEuropean Union LawEconomics ViewFinancial RegulationFintechAnti-money LaunderingFinancial CrimeEconomicsAccountingInternational LawAml EffectivenessRegulatory RequirementFinanceRisk-based ApproachThird DirectiveMoney LaunderingBusinessInternational RiskAml RulesRegulation
In 2005 the European Commission adopted the Third Directive on Anti‑Money Laundering, mandating national implementation by December 2007 and establishing a risk‑based regulatory framework. The study seeks to enhance AML effectiveness by applying a principal‑agent framework to model how a risk‑based approach influences self‑interested financial institutions. The authors employ a principal‑agent model of a three‑layer hierarchy—public authorities, financial institutions, and supervisors—to analyze incentive problems under a risk‑based approach.
Abstract In 2005 the European Commission adopted the Third Directive on Anti-Money Laundering (AML), which was to be implemented into national laws at the latest by December 2007. The key feature that characterizes the Third Directive is the idea that the regulatory framework should be risk-based (RBA). The aim of this regulation is to elicit a high level of outcome in terms of AML effectiveness from self-interested financial institutions (FIs) who hold private information. In this paper we study how to increase the effectiveness of AML rules, using a principal-agent framework to describe the regulatory setting in which an RBA is applied. We focus on incentive problems arising in a three-layer hierarchy, which includes public authorities (policymakers), financial institutions, and supervisors.