The Financial Action Task Force (FATF) recently conducted a public consultation on AML/CFT and Financial Inclusion – proposed changes to FATF Standards. The proposed changes included:
- FATF considering to replace the term “commensurate” with “proportionate” in Recommendation 1, in order to clarify how these concepts should be applied in the context of a risk-based approach; to set clearer expectations with regard to simplified measures; and to align the FATF’s language more closely with that of financial inclusion stakeholders and frameworks.
- Amending regulations to require supervisors to “review and take into account the risk mitigation measures undertaken by financial institutions/DNFBPs”, to avoid overcompliance resulting from an only partial understanding of the risks, and also to consider proportionality in the engagements with them.
- On adoption of simplified measures in lower risk situations, FATF proposes to replace “countries may decide to allow simplified measures” with “countries should allow and encourage simplified measures”. This would place an explicit requirement on countries to be more active in creating an enabling environment for implementation of simplified measures.
- On “non-face-to-face customer-identification and transactions” as an example of potentially higher-risk situations, addition of qualification (“unless appropriate risk mitigation measures have been implemented”) to reflect technological advancements in digital identity systems that may reduce the risks associated with non-face-to-face interactions, and recognise that in many countries this has become the normal mode of interaction with financial institutions.
What could this mean for financial institutions?
Napier AI welcomes the proposed revisions and continues to favour the risk-based approach as the essential foundation to the efficient allocation of resources across the anti-money laundering and countering the financing of terrorism (AML/CFT) regime for financial institutions. Replacing "commensurate" with "proportionate" and explicitly defining the term emphasises a more precise alignment between identified risks and mitigation efforts. This shift can help institutions adopt measures that are both effective and contextually appropriate, ensuring resources are directed where they are needed most without imposing excessive compliance burdens.
Shifting the focus from ‘compliance on paper’ to achieve tangible outcomes empowers financial institutions to address risks in ways that align with their unique profiles and those of their customers. This approach supports a more pragmatic and impactful regulatory environment. This clarification can aid in fostering confidence among financial institutions, enabling them to tailor their risk mitigation measures without fear of regulatory uncertainty or punitive action for proportional responses.
Risk management should be proportional and justifiable, enabling institutions to focus on genuine threats to ensure fair access to financial services. For instance, in some cases, assessing politically exposed persons (PEPs) may only require examining immediate relatives and close associates, avoiding unnecessary overreach. Striking the right balance is essential; being risk-averse should not come at the cost of denying access to financial services for those who require them for legitimate purposes.
Dynamic and continuous risk assessments, particularly in client risk evaluations, can enable accurate identification and prevention of financial crime while minimising the number of false positives and negatives that can obscure genuine threats and hinder efficiency.
Traditional risk-based approaches often rely heavily on historical factors, such as country risk profiles, which can perpetuate outdated biases. As the global risk landscape evolves, for example, as the FATF updates country wise mutual evaluations, financial institutions need to base decisions on evidence that reflects their specific customer base and operations. Incorporating broader datasets, both structured and unstructured, allows institutions to dynamically segment customer behaviors and calculate shifts in material risk, enabling precise and adaptable risk scoring.
Embedding explainable AI and synthetic data within AML/CFT systems further strengthens compliance efforts by uncovering and addressing flawed assumptions. This fosters financial inclusion, particularly for historically underbanked sectors, by enabling institutions to assess risks more accurately. A sophisticated risk-based approach can utilise differentiated/ multiple screening configurations tailored to various customer segments, moving away from binary, one-size-fits-all rules that disproportionately penalise certain customers, such as those involved in cross-border transactions to high-risk jurisdictions.
Shifting from 'may' to 'should
On the issue of simplified measures for lower-risk situations, FATF's suggestion to shift from “may” to “should allow and encourage” is a welcome move. It reinforces the importance of enabling a practical regulatory environment that explicitly supports streamlined measures where risks are demonstrably low. This can drive efficiency and inclusivity, particularly in areas where financial inclusion efforts intersect with AML/CFT regulations. For example, by encouraging simplified processes, institutions can better serve underbanked or underserved communities without compromising risk management standards.
Clear definitions of what constitutes low-risk are also crucial to the success of a risk-based approach. In the absence of explicit regulatory guidance, financial institutions may revert to manual investigations of all alerts due to fear of non-compliance repercussions. This undermines the efficiency of even the most robust systems. A well-executed risk-based approach acknowledges the existence of true positives and negatives alongside their counterparts, maintaining a balance that supports both compliance and operational effectiveness.
Napier AI is committed to advancing AML/CFT compliance by championing the principles of a risk-based approach and supporting financial institutions with technology that drives meaningful outcomes. Through innovation and continuous improvement, we aim to enhance risk management processes while fostering inclusion and regulatory excellence.
More on regulatory amendments;
Napier AI recently contributed to the FinCEN consultation on the “Effective, Risk-Based, and Reasonably Designed” approach for AML/CFT programs. Read full response from Will Monk, Chief Product Officer at Napier AI.
Photo by Billy Huynh on Unsplash
