In the fight against money laundering and terrorist financing, it all comes down to the factor of risk. It is therefore imperative that institutions thoroughly and continuously assess their risks in these areas. Birgit Rodolphe, Chief Executive Director of Resolution and Prevention of Money Laundering at BaFin, explains why.

Risk is the decisive factor in the prevention of money laundering and terrorist financing. The individual risk of each company in the financial sector determines which countermeasures they take and which due diligence obligations they are required to fulfil. However, the risk landscape is constantly changing, especially with regard to money laundering and terrorist financing. This makes it particularly challenging to manage – and mitigate – these risks.

BaFin expects companies in the financial sector to detect, assess and mitigate their money laundering risks. And they need to do so on an ongoing basis. A one-off analysis is not enough when the threat situation is so dynamic: the payment landscape is increasingly fragmented, the crypto business is developing rapidly, and the risks posed by high-risk evasive transactions, such as those involving high-risk countries and sanctions, are increasing. Continuous detection and mitigation of risks is absolutely essential here.

Supervisory practice shows that we cannot assume that small institutions automatically have a low risk of being misused for money laundering and terrorist financing purposes. No matter how small an institution is: if it is taking high money laundering risks, it must adapt the quality of its preventive measures accordingly. We want to see individual prevention systems that are precisely calibrated.

However, this calibration will fall short if companies are not aware of the risks and do not understand their customers’ business models. This lack of knowledge is dangerous – and, in BaFin’s view, untenable. An institution can only detect risks if it knows its customers, understands their business models and can comprehend their transactions. For example, in the event that a customer attempts to circumvent sanctions.

COMMENT

A welcome approach but too late: the EU's Anti Money Laundering Authority is shaping up to be an autocratic regulator compelling compliance and the extent of risk awareness and assessment. And if BaFin, also in Frankfurt, is making these noises in its dying days as a money laundering regulator, it seems unlikely that it will be heard and its recommendations acted upon.