Demystifying the Risk‑Based Approach: Your Core AML/CFT Responsibilities

Introduction: The Centrality of the Risk‑Based Approach

The Risk‑Based Approach (RBA) stands as the central pillar of the European Union's legal framework for combating Money Laundering and Terrorist Financing (ML/TF). This principle is not merely a recommendation but a foundational requirement that shapes all anti‑financial crime efforts for obliged entities. The purpose of this article is to outline the key tasks and responsibilities this approach imposes on banks, as viewed through the lens of regulatory and supervisory expectations.

1. The Legal Foundation of the RBA

Adherence to the RBA is not a best practice but a legal requirement for all credit and financial institutions operating within the EU. This mandate is driven by key legislative and international standards designed to create a consistent and effective defense against financial crime.

• Directive (EU) 2015/849: This directive formally places the Risk‑Based Approach at the center of the EU's AML/CFT framework. It also mandates that National Competent Authorities (NCAs) must conduct their supervision on a risk‑sensitive basis, aligning both regulatory oversight and institutional compliance under the same core principle.
• FATF International Standards: A primary goal of EU legislation is to align with the “International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation” adopted by the Financial Action Task Force (FATF). This ensures the region's AML/CFT measures are consistent with global requirements.
• EBA Risk‑Based Supervision Guidelines: The European Banking Authority (EBA) provides further detail through its “Guidelines on the characteristics of a risk‑based approach to AML/CFT supervision.” These guidelines are critical for institutions to understand, as they clarify the specific expectations for supervisors and, by extension, for the obliged entities they oversee.

2. Key RBA‑Driven Tasks for Banks

2.1. Implement and Maintain Effective Systems and Controls

Banks are required to have adequate and effective Anti‑Money Laundering and Countering the Financing of Terrorism (AML/CFT) systems and controls in place. The adequacy and effectiveness of these internal systems are a primary focus for assessment by National Competent Authorities.

2.2. Conduct Comprehensive Risk Assessments and Due Diligence

A core responsibility under the RBA is the continuous assessment of ML/TF risks. This is an integrated process where performing comprehensive Customer Due Diligence serves as the practical mechanism for gathering the necessary information. This information then allows the institution to consider the specific factors that indicate potential ML/TF risk in individual business relationships and occasional transactions, forming the basis of its risk assessment.

2.3. Ensure and Demonstrate Compliance

Banks are expected to ensure ongoing compliance with all applicable AML/CFT rules. This proactive stance includes addressing sector‑wide vulnerabilities identified by NCAs. Furthermore, institutions must be prepared to respond to and engage with supervisory tools, such as the annual AML/CFT questionnaire, which are used to monitor compliance levels.

3. Understanding the Supervisory Perspective

To effectively manage risk, it is crucial to understand how NCAs apply the RBA when supervising banks. This supervisory approach directly impacts how an institution's compliance framework is assessed.

1. Risk‑Based Supervision: NCAs are mandated to apply a risk‑based approach to their own supervisory activities. This ensures their strategy is effective and proportionate to the level of ML/TF risk associated with the sector and individual obliged entities.
2. Resource Allocation: NCAs allocate supervisory resources based on an obliged entity's risk profile. They establish refined cycles of supervisory activities according to the risk category to which an institution is assigned.
3. Use of Bank Assessments: A bank's own entity‑level risk assessments are a key input for this supervisory process. Supervisory plans focus on the use of entity‑level risk assessments to fine‑tune the choice of supervisory tools, creating a more tailored and efficient oversight process.

4. Conclusion: Proportionality is Key

The core principle of the Risk‑Based Approach is ensuring that AML/CFT efforts and resources are allocated in a manner that is proportionate and sensitive to the specific ML/TF risks identified. This applies equally to the internal controls within a bank and the oversight activities conducted by its supervisors. By focusing resources where the risk is greatest, the RBA aims to create a more effective and efficient framework for preventing financial crime.