Guidance for applying a risk based approach to supervision

Preventing money laundering or terrorist financing (ML/TF) is more effective in protecting communities from harm than pursuing prosecution of the activity after it happens. AML/CFT supervisors play an essential role in protecting the financial system and other sectors from misuse by criminals and terrorists by: (1) increasing regulated entities awareness and understanding of the ML/TF risks and setting regulatory obligations and facilitating and encouraging good practices, (2) enforcing and monitoring compliance with AML/CFT obligations, and (3) taking appropriate measures where deficiencies are identified. In order to perform this function effectively and efficiently, supervisors must implement a risk-based approach. A risk-based approach involves tailoring the supervisory response to fit the assessed risks.

The objective of this non-binding Guidance is to clarify and explain how supervisors should apply a risk-based approach to their activities in line with the FATF Standards. In addition to explaining common expectations, the Guidance is also forward looking and identifies innovative practices that can help improve the effectiveness of AML/CFT supervision and thus the overall AML/CFT system. This Guidance focuses on the general process by which a supervisor, according to its understanding of risks, should allocate its resources and adopt risk-appropriate tools to achieve effective AML/CFT supervision. While the Guidance identifies some of the specificities in supervising the financial sector vis-à-vis other sectors, it does not seek to identify or address sectoral risks. This guidance complements the sector-specific guidance in the FATF’s sector specific risk-based approach guidance documents.