Abstract
The study aims at developing an approach to determining the bank connectivity level. This will contribute to implementing a risk-oriented approach to counteracting money laundering, terrorist financing and the proliferation of mass destruction weapons. The article proposes to assess the degree of bank connectivity and determine the impact of these circumstances on money laundering risk using banks from foreign banking groups, whose capital share in the Ukrainian banking system amounts to more than 40 percent. Using the resulting correlation dependencies, two-dimensional binary matrices were constructed, which became the basis for creating graphs of links between banks. The institutions under study are found to be predominantly connected in terms of their sets (varieties), since the average proportion of banks with close direct links is over half, and the non-connectivity coefficient for them is about 40%. Each surveyed bank, on average, has direct links with eight other banks and inverse links with four other banks. Considering banks as tops of the graph, one can assume that there is a hidden relationship between some banks. This approach allows calculating all existing relationships between banks to assess risk. Transforming the graph from non-oriented to oriented made it possible to identify and clearly demonstrate possible directions of links between the investigated financial institutions, which should be further verified to determine the risk of money laundering, terrorist financing, etc.
Highlights
Money laundering (ML), terrorist financing (TF), and financing the proliferation of weapons of mass destruction (WMD) are significant global dangers affecting the financial system
This is the case of the outcome of the risk assessment by the primary financial monitoring entity, based on the analysis of a set of defined criteria, which may indicate a high likelihood of using the primary financial monitoring entity to legalize proceeds from crime, terrorist financing and/or financing the proliferation of mass destruction weapons
Applying the FATF international financial monitoring standards to primary financial monitoring entities, i.e., banks, aims at using a risk-oriented approach that takes into account the relationships between them, that is, possible use of networks
Summary
Money laundering (ML), terrorist financing (TF), and financing the proliferation of weapons of mass destruction (WMD) are significant global dangers affecting the financial system. This is the case of the outcome of the risk assessment by the primary financial monitoring entity, based on the analysis of a set of defined criteria, which may indicate a high likelihood of using the primary financial monitoring entity to legalize (launder) proceeds from crime, terrorist financing and/or financing the proliferation of mass destruction weapons According to this draft law, it is risk management, that is, taking measures by financial institutions to create and ensure the functioning of the risk management system, which includes, in particular, the definition (detection), assessment/revaluation (measurement), monitoring, control of risks to minimize them, that changes the financial monitoring system priorities. Introducing a risk-oriented approach that aims at identifying (detecting), assessing (re-evaluating) and understanding the risks of legalizing (laundering) proceeds from crime, terrorist financing or the proliferation of mass destruction weapons, and taking appropriate management measures in the way and to the extent that ensure the effective minimization of such risks depending on their level (The Verkhovna Rada of Ukraine, 2019), should further be based on methodological guidelines for determination, assessment/revaluation (measurement), and control of risks
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