Steps to Conduct an Effective Risk Assessment Process

Blog / Steps to Conduct an Effective Risk Assessment Process

One of the most trending topics of all time in every industry does not change: The Risks. Each sector has its own hazards and challenges at different levels. Also, they have strategies or rules to be prepared and fight with them. Although the risks are variable according to the many determinants such as industry, company size, location, or time, awareness of them comes at the very first step regardless of other determinants. At this point, an efficient breach determination and risk assessment procedure take the stage to recognize risks. So, what is a risk assessment, and how to conduct a comprehensive and efficient risk assessment procedure?

Risk assessment in the AML industry is a procedure that helps companies understand what conditions increase the chances of a customer's involvement in money laundering or terrorist financing. AML risk assessment, which is an integral part of AML compliance, involves systematically identifying, analyzing, and mitigating potential risks associated with money laundering and terrorist financing activities. Authorities expect companies to proactively combat money laundering and terrorist financing. This is the first action they must tackle for comprehensive AML compliance. It might be impossible to eliminate all the risks, but the responsibility is to reduce its potential. At the core of effective AML risk assessment is the adoption of a risk-based approach, where companies tailor their risk mitigation strategies according to the specific threats and vulnerabilities they face.

detailed examination of kyc and risk assessment products

Why Should Companies Evaluate the Risks?

There is no exit way from regulations of AML compliance if a company is working in the related fields. However, company owners and management teams must give importance to this not just because of regulations but also to protect their companies’ safety. Today, it is beyond a legal duty to comply with local or international AML/CFT rules. Incorporating a risk-based approach into AML compliance measures is not only a legal requirement but also a fundamental strategy to safeguard a company's financial security and reputation.

The range of the risks changes according to:

  • Company size and sophistication of the business
  • Number of customers
  • Companies' KYC procedures
  • Number of third parties working together with
  • The amount of money that the firm manages
  • Location and Currency
  • Location of customers and third parties, etc.

Considering all of these, there are several reasons that make assessment crucial for firms:

Risk Assessment Steps

Potential harms threaten the company with financial and reputational consequences. They might lose money because of criminal activity and then as a fine resulting from AML compliance regulations. After that, the company might lose credit in the eyes of customers and competitors in the market. Whereas being prepared against them is easier than coping with those consequences. There is a risk assessment matrix as an example for your businesses below. 

A beneficial risk assessment requires the following steps;

  • Evaluate the risks: they are hazards that possibly result in financial crime
  • Determine the levels, how likely it is, and how severe the outcomes: this step makes it easier to trace activities and focus on high-risks
  • Reduce the risk with a strong customer onboarding process: if a firm follows an effective Know Your Customer program, this helps to eliminate potential risks
  • Decide on the precautions: there must be a strategy to follow when a risky action is detected
  • Record data of customers, transactions, and findings: they all might become necessary for reporting and comparing with recent data. For example, firms must send a Suspicious Activity Report (SAR) to the National Crime Agency in the UK if they detect one.
  • Regularly review assessment procedure and update: the world changes faster than ever with technology, and companies must catch the improvements and updates in regulations or lists. 

Implementing a risk-based approach throughout the risk assessment process is crucial for companies to effectively prioritize and address potential financial crime risks. In addition, having an assigned employee or a team to implement these procedures is significant. If your company has one, these can be the same people as compliance employees or teams. Because this is a constant program, it requires following and updating from time to time. Also, companies must take immediate action when they face high-level risks during or after evaluation. If the duty is not assigned to someone, the possibility of missing risky conditions increases.

Conducting a comprehensive and ongoing AML risk assessment is the cornerstone of an effective AML compliance program. AML risk assessment helps companies proactively identify, evaluate, and mitigate potential risks associated with money laundering and terrorist financing activities, ensuring a safer and more secure operational environment.

How to Deal With Risk Assessment Procedure?

Risk management gets easier if a company applies a complete evaluation procedure. Once the potential and hazards are identified, officials can focus on high-risk customers and activities without wasting time with countless of them.

If the assessment process seems difficult, there is no need to worry about recent technological developments. Sanction Scanner provides software products for companies in financial services to evaluate their risks and then manage the whole operations accordingly.

Customer Risk Assessment Solution helps companies to;

  • Easily set risk criteria and rules
  • Determine customers’ risk levels according to your own indicators
  • Have scorecards for each customer
  • Manage alerts with different risk levels

Simplify Risk Assessment with a Sanction Scanner

Strengthen your business with greater control compliance with a risk-based approach and risk-based scorecard review.  Sanction Scanner's AML risk assessment tools can help streamline and enhance your risk assessment process, allowing you to proactively identify and mitigate potential risks associated with money laundering and terrorist financing activities.

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