News & Insights

Milestone proposal to bring risk-based approach to Financial Institutions’ AML/CFT Programs

Louis Dodd
Thu, 04 Jul, 2024

On 28 June FinCEN issued a proposal to Strengthen and Modernize Financial Institutions’ programs to fight Money Laundering and Terrorist Financing

Described by FinCEN Director Andrea Gacki, as a “milestone in FinCEN’s efforts to implement the AML Act”, the proposed rule would make establishing a risk based AML/CFT program a regulatory requirement for those financial institutions which it covers. 

Notably, the AML/ CFT program NPRM would:

  • Amend the existing program rules to explicitly require financial institutions to establish, implement, and maintain effective, risk-based, and reasonably designed AML/CFT programs;
  • Require financial institutions to review government-wide AML/CFT priorities and incorporate them, as appropriate, into risk-based programs; and
  • Promote clarity and consistency across FinCEN’s program rules for different types of financial institutions.

The proposed rule seeks to avoid “one size fits all” approaches to customer risk which can inhibit financial inclusion through financial institutions declining to provide financial services to entire categories of customers. 

It also seeks to “encourage technological innovation and the adoption of new technology by financial institutions” with the goal of countering AML and CFT risks more efficiently. 

Continued trend towards greater alignment with international AML/CFT standards
In the US today there is an absence of a formal requirement for a risk based approach. Whilst many types of financial institutions currently have their own risk assessment processes the proposed rule, if enacted, will standardise the requirement for risk assessment processes. 

As such it is a stepping stone towards further alignment with FATF Recommendations for combatting money laundering, terrorist financing and the financing of proliferation, a cornerstone for which is the risk-based approach. 

FinCEN sees the proposed rule as setting a “critical foundation” for potential future changes in the AML/CFT framework.  It closely follows a proposal issued jointly in May by FinCEN and the SEC pertaining to the implementation of Customer Identification Program obligations for certain investment advisors, and a separate FinCEN proposal, issued in February, to designate RIAs and ERAs as “financial institutions” under the Bank Secrecy Act and subject them to AML/CFT program requirements.  

Comment period
Written comments on FinCEN’s proposed rule must be received on or before 60 days following its publication in the Federal Register.

Are you funds compliant?
Whilst this NPRM is currently at consultation stage,  it forms part of an ongoing direction of travel towards greater US alignment with international compliance standards, and is in line with FATF Recommendations.

Financial institutions, including private markets fund managers should, if not doing so already, consider reviewing their existing AML/CFT program and undertaking a formal risk assessment as part of this process. 

How we can help
Through bringing together people and technology IDR offers a fully integrated KYC and Compliance solution for fund managers covering:

  • One-and-done approval of your investor KYC to the highest international standards. Profiles are maintained centrally on our platform and screened daily;
  • Designation and ongoing monitoring of an appropriate risk rating for each investor profile;
  • Review and testing of your existing AML / CFT program, policies and procedures to ensure that these adhere to international best practice and are aligned with the overall risk profile of your investor base and fund strategy;
  • Review and incorporation of current and ongoing regulatory priorities and requirements in the US and around the globe into your AML program; and
  • Employee training and development.

For more information on how we can help reach out to Louis Dodd or explore our KYC and MLRO Solutions.


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