Definition and Purpose

An AML Risk Assessment is a formal systematic assessment undertaken by financial services and other obligated entities to control for and assess money laundering and terrorist financing (ML/TF) risk and the susceptibility of an entity's operational efforts. The AML Risk Assessment is the foundation of a risk-based compliance approach which seeks to place greater focus and stronger controls on those operational areas that are higher risk.

An AML Risk Assessment is not just a regulatory need to check off; it is a compliance need, an ongoing document that must be adjusted every year or every time the business model, clientele, services or products offered, and regulatory requirements change.

Why AML Risk Assessments Are Important

Compliance Need

Regulatory bodies worldwide require these obligated entities to have and maintain up to date AML risk assessments. FINTRAC (Canada) stipulates this for obligated Canadian entities. FATF, the FCA (UK), and FinCEN (US) require similarly obligated entities to assess their risk annually at the very least, if not more frequently, to remain in compliance; failure to do so results in an enforcement action, monetary fine, or, in the worst-case scenario, suspension or revocation of licensure.

Effective Risk Management

An AML Risk Assessment helps identify:

• High-risk customers (e.g., PEPs, offshore entities)
• Vulnerable products or services (e.g., cross-border remittances, crypto)
• Weaknesses in existing controls

It ensures that organizations direct their resources to where the risks are highest.

Operational Efficiency

Creates a lower cost structure since companies don't overcontrol when they understand their true risk and avoid compliance costs where cost-effective resources might otherwise be applied. Allows for cost effective, risk sensitive allocation of compliance financial resources.

Key Components of an AML Risk Assessment

1. Customer Risk

• Types of customers (individuals, corporates, trusts, etc.)
• Source of funds and wealth
• Customer's occupation or industry
• Politically exposed persons (PEPs)
• Geographic location

2. Product/Service Risk

• Nature of financial products and services offered
• Potential for anonymity or misuse
• Complexity and transparency of transactions

3. Geographic Risk

• Exposure to high-risk jurisdictions
• Countries with weak AML/CFT regimes
• Sanctions and FATF-listed nations

4. Delivery Channel Risk

• Face-to-face vs. non-face-to-face onboarding
• Online onboarding or third-party reliance
• Use of intermediaries or agents

Steps to Conduct an AML Risk Assessment

Identify Risks

Review customer segments, product offerings, delivery methods, and geography.

Assess Risk Levels

Use a standardized rating or scoring methodology (e.g., low, medium, high).

Evaluate Current Controls

Examine how effective current policies, procedures, and systems are in mitigating identified risks.

Determine Residual Risk

Determine the new level of risk after controls have been applied.

Document Findings

Maintain a comprehensive, well-documented record of the risk assessment process and outcomes.

Update Regularly

Reassess the risk profile periodically or when major business or regulatory changes occur.

AML Incubator’s Role in Risk Assessment

As Your Trusted Partner in Regulatory Excellence, AML Incubator will assist in the creation, implementation, and subsequent review of an AML Risk Assessment.

We assist clients with:

• Ongoing CAMLO/MLRO services
• → CAMLO/MLRO
• MSB registration support
• → MSB Registration
• Enhanced Due Diligence for high-risk clients
• → EDD Services
• Effectiveness reviews to evaluate control gaps
• → Effectiveness Review
• Regulatory remediation when audits or exams uncover compliance failures
• → Regulatory Remediation

Conclusion

AML Risk Assessments are essential for both regulatory compliance and risk mitigation. They help organizations take a proactive, structured approach to identifying and managing the threats of money laundering and terrorist financing.

Rather than being a checkbox exercise, a well-maintained risk assessment can help institutions operate more securely, efficiently, and in alignment with global expectations.

Further Reading from AML Incubator

• The Success from Day One: 4 Benefits of Outsourcing Compliance for Startups
• 5 Components of an Effective Compliance Program in Canada
• Why Companies Outsource Compliance
• Unmasking the Shadows: Understanding Money Laundering
• Understanding Cryptocurrency Exchanges and the Role of Market Makers