Money laundering regulation and risk-based decision-making

Purpose - The current emphasis in anti-money laundering (AML)/counter terrorist financing (CTF) regulation on "risk-based" strategies means that regulatory, law enforcement and reporting agencies need to respond to money laundering and terrorist-financing threats in ways that are proportionate to the risks involved. However, the way that risk is conceptualized remains vague, and the requirements on agencies imposed by the risk-based approach involve a significant element of uncertainty. The paper addresses these issues. Design/methodology/approach - This paper examines the attributes of risk as it applies to AML/CTF strategy in the context of regulatory risk and related forms of risk assessment, and argues that there are a number of conditions that must be met if risk-based decision-making for AML/CTF is to work effectively. Findings - This paper argues that there are a number of conditions that must be met if risk-based decision-making is to work effectively. Three of the most important conditions are that there has to be agreement about what risk is being decided on; there must be explicit, quantifiable models of risk, and those responsible for developing and refining risk-based decision models must have access to knowledge about the outcomes of assessments. Originality/value - The paper identifies the need for fundamental changes in the relationship between the regulators and the regulated.