Financial Institutions - Country Solutions to Manage AML Risk

Is it focused on AML?

It is important to have a Country Risk Model that is central to the type of risk one is trying to monitor.  Some models are centered around AML risk, while others may be more focused on credit risk/ratings, or the overall economic or political stability of a country. 

Are you familiar with its data sources? 

Part of understandings Country Risk Models is ensuring that one knows what sources are being used in the model’s calculations.  It is important to assess lists that may be recognized by regulators in AML risk assessments such as the OFAC Sanctions list and the International Narcotics Control Strategy Report (INCSR).  Other sources of information which should be considered are provided at the end of this article.

Is it transparent?

Even if one knows the model’s data sources, is it clear how they are being used to generate risk ratings? 

Does it allow for backtesting and overrides?

• Justifying overrides of a model’s results, based on factors that are specific to your bank’s needs can be appropriate, but the justification must always be
  documented.  When model or tool overrides are necessary it may provide evidence that the country risk model may not be the best solution for a particular bank.
   
• When are overrides appropriate?

Many banks will opt to override the risk rating of the country in which their Head Office is located.  For example, a US branch of a bank whose head office is in a high-risk country may override that country to a lower risk rating, as many of their customers are primarily companies and individuals in that country, however, the US Branch Office staff including compliance team members are very familiar with the home office country activities, client base, and risk profile.

U.S. Department of the Treasury

• Office of Foreign Asset Control (OFAC) Sanctions Program and Country Information

OFAC administers a number of different sanctions programs which can be either comprehensive or selective depending on the country or region to which the sanction is applied. 

US State Department

• Country Reports on Terrorism

The Country Reports on Terrorism provide a complete annual report on terrorism for countries and groups around the world.

• International Narcotics Control Strategy Report (INCSR):
  • Volume I: Drugs and Chemical Control
    • Volume I of the INCSR provides Country Reports and lists that includes:
      • Major Illicit Drug Producing and Major Drug-Transit Countries
      • Major Precursor Chemical Source Countries
      • Major Money Laundering Countries
  • Volume II: Money Laundering
    • Provides a list of Major Money Laundering Jurisdictions, as well as reports for each listed country.
• State Sponsors of Terrorism
  • Provides a list of countries that have repeatedly provided support for acts of international terrorism as determined by the Secretary of State.

Transparency International

• Corruption Perceptions Index

The Corruption Perceptions Index is published annually and ranks countries by their perceived levels of public sector corruption, as determined by expert assessments and opinion surveys. 

The Financial Action Task Force (FATF)

• Members

The FATF is a global money laundering and terrorist financing watchdog, currently comprised of 37 member jurisdictions and 2 regional organizations.  Members of the FATF can be used to lower a member country’s risk rating. 

Organization for Economic Cooperation and Development (OECD)

The OECD is an international organization comprised of 37 countries researching a variety of global issues, ultimately establishing evidence-based international standards and finding solutions to a range of social, economic and environmental changes. 

• OECD Standards of Transparency and Exchange of information on Tax Matters
  • Provides a multilateral framework for international cooperation with regards to tax transparency and exchange of information.  Originally focused on tax havens, it has since developed standards of transparency, information sharing, and the maintenance of accounting records.

Without a model that accurately assesses the risk of any given country on an ongoing basis, it becomes more difficult to ensure a bank is appropriately identifying and evaluating country-specific risks, including the potential impacts those risks may have on one’s business. 
Not only will the country risk model be used as an input into bank wide risk assessments, but it will also be used directly as a key alert differentiator in transaction monitoring systems. Therefore, implementing an accurate Country Risk Model helps banks identify and evaluate AML risk, mitigate those risks and furthermore, helps satisfy regulators in an examination process.  

Sia Partners has extensive experience in all aspects of the implementation and independent testing of AML & Sanction tools.  We assist in all aspects of Country Risk Models, including independent reviews, tool selection, model implementation, and override justification when applicable.