Preventing Money Laundering and Terrorist Financing
2 Examination Issues and Approaches An AML/CFT supervisor must first organize and develop the examination program. Before an efficient and comprehensive AML/CFT examination program can be developed, a number of issues, some of which are discussed below, must be taken into account.
2.1 Risk-Based Approach Versus Standardized Approach A comprehensive examination would examine every bank for every AML/CFT issue every year. Unfortunately, because of limited budgets and a similarly limited number of bank examiners and other supervisory experts, that approach is not a practical one. Approaches to bank examinations may vary but, in today’s world there seems to be one particularly effective and efficient way to supervise banks, and that is the riskbased approach shown in box 5.1. This approach uses the bank’s risk profile as the basis both for reviewing a bank’s AML/CFT compliance program and for determining the effectiveness of its AML/CFT policies and procedures.2 It verifies whether systems actually function as designed by using transaction testing. By adopting a risk-based approach, bank supervisors can focus on those banks that are at high risk for money laundering and financing of terrorism (ML/FT). Larger, more complex banks involved in cross-border transactions, or those banks that focus on private banking, are examples of likely candidates for additional scrutiny.
2.2 The Inspection Cycle and Examination Notification
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2.2.1 Examination Frequency The frequency of examinations varies by jurisdiction, but many jurisdictions base it on several factors such as bank size, complexity, rating, and risk profile. A bank operating with few or no problems might be examined every 12 to 18 months, for example. Those banks with significant issues, however, or ongoing problems identified in past examinations, would be scheduled for more frequent examinations. It might be appropriate for banks experiencing some problems to have an annual examination, while banks with more serious issues might be visited every six months or even more frequently. In addition to the on-site examination, an effective banking supervisory system also includes an off-site supervisory process and regular contacts with bank management.3
2.2.2 On-Site AML/CFT Examination Notification Many jurisdictions notify bank management in advance of the proposed examination and the specific date that it will begin.4 During the notification, the management of 82