Module 2 – Main Takeaways

Risk and Context

The starting point for every assessment is the assessors’ initial understanding of the country’s
risks and context, in the widest sense, and the elements contributing to them. This includes:

i. the nature and extent of the money laundering and terrorist financing risks ;
ii. the circumstances of the country, which affect the materiality of factors that impact
different Recommendations (e.g., the makeup of its economy and its financial
sector);
iii. structural elements which underpin the AML/CFT/CFT system;
iv. other contextual factors could influence how AML/CFT/CPF measures
are implemented and how effective they are.

Risk is the likelihood that a threat could take advantage of a vulnerability to produce a
consequence.

When assessing risk, countries and the private sector should analyse and seek to understand
how identified risks affect them; the risk assessment, therefore, provides the basis for the
risk- sensitive application of AML/CFT measures. In other words, the FATF Methodology calls
for a risk-based approach (RBA).
While the nature and extent of ML/TF/PF risks is crucial for assessors to consider, it is not the
only principal factor. There are three other key factors to consider:
a) Materiality (e.g., size of the financial sector; size of informal economy).
b) Structural elements (e.g., political and institutional stability; the rule of law).
c) Other contextual factors (e.g., the level of transparency, corruption and the impact
of measures to combat it; Level of financial exclusion).
During the ME, assessors draw conclusions on a country’s ML/TF risks, materiality, structural
elements and contextual factors to understand the environment in which a country’s
AML/CFT/CPF regime operates.
Concerning risk, materiality and context, assessors should weight the financial, DNFBP and
VASP sectors in the country as:

“most highly important”,

“moderately important” or

“less important”.

Introduction to the FATF Global Standards, Methodology and Procedures – Module 2 1

Immediate Outcome 1
IO.1 examines whether the country correctly identifies, assesses and understands its money
laundering and terrorist financing risks. It also examines whether policies are co-operatively
developed and, where appropriate, actions coordinated domestically to combat money
laundering and the financing of terrorism.
When evaluating how effective a country is related to IO1, an assessor would look at six core
issues that enable them to get the most important insights about the country's
performance.
Core Issue 1: How well does a country identify, assess and understand its ML/TF risks?
Core Issue 2: How well do national AML/CFT policies and activities address the identified
ML/TF risks?

Core Issue 3: To what extent are the results of the assessment(s) of ML/TF risks properly used
to justify exemptions and support the application of measures for different scenarios?
Core Issue 4: To what extent are the objectives and activities of the competent authorities
and Self-regulating bodies (SRBs) consistent with the evolving national AML/CFT policies and
the identified ML/TF risks?
Core Issue 5: To what extent do the competent authorities and SRBs coordinate developing
and implementing policies to combat ML/TF?

Core Issue 6: To what extent do the competent authorities cooperate and, where
appropriate, coordinate for operational purposes related to AML/CFT?
To assist countries in understanding what an effective system under IO.1 looks like, the
Methodology lists the following characteristics:

- Proper identification, assessment and understanding of the country’s ML and TF risks

using various reliable information sources and tools.
- Effective domestic cooperation, coordination, and timely information sharing among
relevant domestic partners to develop AML/CFT policies and mitigate identified ML/TF
risks.
- ML/TF policies and operational activities are prioritised based on identified ML/TF risks.
- Communication of AML/CFT policies coordinated across appropriate channels, including
the private sector.

Introduction to the FATF Global Standards, Methodology and Procedures – Module 2 2

 IO.1 Effectiveness Indicators
Core
Objective
Issue
How well does a country
1.1 identify, assess and understand
its ML/TF risks?
How well do national AML/CFT
1.2 policies and activities address
the identified ML/TF risks?
To what extent are the results
of the assessment(s) of ML/TF
risks properly used to justify
1.3
exemptions and support the
application of measures for
different scenarios?
To what extent are the
objectives and activities of the
competent authorities and Self-
1.4 regulating bodies (SRBs)
consistent with the evolving
national AML/CFT policies and
with the ML/TF risks identified?
To what extent do the
competent authorities and SRBs
1.5 co-ordinate the development
and implementation of policies
to combat ML/TF?
To what extent do the
competent authorities co-
operate and, where
1.6
appropriate, co-ordinate for
operational purposes related to
AML/CFT.
Introduction to the FATF Global Standards, Methodology and Procedures – Module 2
Indicators of effectiveness
1. Designating a national authority or mechanism to assess
ML/TF risk at a national level.
2. Developing an accurate and up-to-date understanding of
the country’s ML/TF risk.
3. National experts share a collective understanding of the
ML/TF risks facing the country.
4. After identifying the ML/TF risks, a country should design
specific actions to mitigate them.
5. Countries can design a national risk-based AML/CFT
strategy including these actions or divide them by sector.
6. The level of risk should justify the measure in place.
- For higher-risk sectors, countries should put enhanced
measures into a plan to mitigate these risks.
- For lower ML/TF risk sectors, they can put simplified
measures into place.
7. The entire AML/CFT regime is coherent and going towards
the same goals and objectives.
8. There is coherency between the ML/TF risks observed, the
national AML/CFT policies implemented, and the activities of
SRBs and competent authorities.
9. The competent authorities making up a country's AML/CFT
regime must be coordinated at a policy level.
10. The competent authorities’ AML/CFT institutional and
legal framework are in place to and coordinated to combat
ML and TF.
11. Competent authorities communicate effectively to share
knowledge, co-operate and act as complementary parts of the
country’s plan to combat ML/TF.
12. The different institutions making up a country AML/CFT
regime must be co-ordinated at an operational level.
13. Each competent authority should be clear in what their
role is the AML/CFT regime, in how the interagency
coordination is conducted with other authorities and the
mechanisms to share information.
3
Relevant FATF Guidance and Training:
Terrorist Financing Risk Assessment Guidance
National money laundering and terrorist financing risk assessment
E-courses available at the FATF @cademy platform:
FATF Easyland – Risk Assessment Curriculum

Introduction to the FATF Global Standards, Methodology and Procedures – Module 2 4