Abstract
This paper proposed a risk assessment model with which supervisory authorities can calculate the money laundering risk (MLR) level of financial institutions and make comparisons among multiple institutions. The model is based on the Analytic Hierarchy Process (AHP) and decomposes MLR into two second-tier criteria, i.e. Inherent Risk & Control Risk. AHP pair wise comparisons made by the experts from various fields are processed through AHP software to get the weight of each factor. Using this model, MLR of each financial institution could be obtained and certain comparison among them could be carried out.
Highlights
Money laundering risk (MLR) is newly recognized as a serious risk endangering the financial sector as well as the whole society, and is drawing increasing attention in recent decades on both regulation and supervision. (Ferwerda, Kattenberg, Chang, Unger, Groot, & Bikker, 2013; Stokes, 2012; Kishor & Lescuyer, 2012) To appropriately apply the risk-based approach recommended in International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation by The Financial Action Task Force on Money Laundering (FATF) and efficiently allocate supervisory resources, national supervisory authorities need to accurately assess the MLR levels of financial institutions
Regarding the lowest hierarchy of factors, the primary task for a financial institution in mitigating MLR is to strictly conduct Performance of customer due diligence (C8, 19.1%) and Performance of suspicious transactions report (C9, 17.3%) measures, and supports from management (C4, 9.4%) is considerable important followed by valid internal rules (C5, 9.1%)
MLR was decomposed into a hierarchy of elements whose weights are computed by Analytic Hierarchy Process (AHP)
Summary
Money laundering risk (MLR) is newly recognized as a serious risk endangering the financial sector as well as the whole society, and is drawing increasing attention in recent decades on both regulation and supervision. (Ferwerda, Kattenberg, Chang, Unger, Groot, & Bikker, 2013; Stokes, 2012; Kishor & Lescuyer, 2012) To appropriately apply the risk-based approach recommended in International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation by The Financial Action Task Force on Money Laundering (FATF) and efficiently allocate supervisory resources, national supervisory authorities need to accurately assess the MLR levels of financial institutions.MLR of an institution could be affected by many factors, including institution size, internal rules, management attitude, and so on. In China, the assessment of MLR are mostly carried out by certain reviewers grouped with supervisors and specialists giving marks considering some factors (Cai & Liu, 2011). As risk factors are distinct from each other in their natures and weights (Wang & Yang, 2007), an overall accurate assessment could not be obtained using this method, it is hard to make comparison within institutions. This research created a MLR assessment model which enables reviewers to evaluate and compare the MLRs of financial institutions. The core task is to find the most significant risk factors and establish a logical MLR assessing model
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