Whatever happened to the risk-based approach?

In the era of intensive and intrusive supervision, another set of guidance, from a regulator already annoyed by thematic findings of business override of the AML agenda, puts the risk-based approach at risk; David Coates considers its prospects.

David Coates may be contacted on david.coates@live.co.uk

That was then

Promulgation of the revised version of the Joint Money Laundering Steering Group (JMLSG) Guidance in 2006 probably marked the high point of a cooperative approach between government, industry, regulator and law enforcement under a “light touch” supervisory regime where the MLRO in a major financial institution could reasonably expect that the tasks he or she was asked to perform would be addressed confidently and with a fair degree of indulgence for the occasional failure. The “risk-based approach” (RBA) was a mantra underlying the whole system which both encouraged firms to make their own judgments about priorities and resource allocation and the Financial Services Authority (FSA) to make a parallel choice about where to apply supervisory resources to best restrain any temptation on the part of the institutions to allow risk analysis to slide into wilful blindness in the interest of maintaining income flows. Even customers, in many respects the forgotten victims of several AML measures, were offered a minor dividend in the form of a reduction in the number of multiple requests for ID documentation. By and large, while not having control of the agenda, banks and their representative organisations were treated with deference and a high degree of attention and respect by HM Treasury and FSA alike. The bible of the financial sector was the industry-generated guidance prepared by an editorial group of practitioners, approved by their memberships and by government, and having legal relevance in enforcement proceedings or court trials. For smaller firms it represented the starting point for addressing their anti-money laundering (AML) concerns. The FSA rule book was pruned to allow pride of place to JMLSG Guidance.