COMPLIANCE imposed on an FI as seen in the recent cases detailed in Table 1. These penalties can often run into millions of dollars.
b. Nonadherence to legal and regulatory requirements: Another impact of dealing with high-risk customers( and not adopting adequate riskbased due diligence measures) is the legal and regulatory scrutiny that an FI has to face which can result in criminal proceedings and stringent supervision by authorities, among other consequences.
The 2LOD evaluates the effectiveness of existing riskbased due dili gence controls to understand if the controls are operating as expected c. Reputational loss: Financial penalties and legal and regulatory scrutiny inevitably result in major reputational loss to any FI, including losing the trust of existing customers, difficulties in attracting new customers and loss of credibility in the market.
3. Assessment of existing controls
As discussed earlier, most FIs implement riskbased due diligence controls to mitigate the risk posed by dealing with high-risk customers. During the assessment stage of risk management, the 2LOD assesses existing risk-based due diligence controls to understand the design and operating effectiveness of the controls and to ascertain that residual risk, if any, is within the risk appetite of the FI. The steps included in the assessment stage would, at a minimum, include those listed below.
a. Mapping of legal and regulatory requirements to risk-based due diligence controls: An FI’ s 2LOD conducts a thorough study and research of jurisdictional AML and financial crime regulations to refresh and update the FI’ s risk-based due diligence procedures to align with legal and regulatory requirements. This is a key step for any FI to stay compliant.
b. Assessment and evaluation of the controls’ operating effectiveness: The 2LOD evaluates the effectiveness of existing risk-based due diligence controls to understand if the controls are operating as expected. In addition, the team also reviews the job-aids and process flows to ensure the documentation used for executing the control is updated and relevant. Another important aspect of this step is to review the AML / terrorist financing skills and knowledge possessed by the operational team to assess if the controls are being executed by individuals with the required skillsets and knowledge.
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