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Typology Based Approach

Typology Based Approach versus Risk Based Approach – Complementary issues

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The Typology-Based Approach (TBA) is a methodology used to identify, analyze, and categorize methods, techniques, and indicators of money laundering and terrorist financing. It involves the collection and analysis of data on cases related to these activities, aiming to identify common patterns and trends that can be used to develop strategies and policies to combat them.

As ML/FT methods and techniques are continuously evolving, the TBA recognizes the need for a systematic approach to identifying and categorizing these methods to prevent and detect money laundering. The TBA consists of four key steps, namely data collection, analysis, categorization, and development of strategies

  1. DATA COLLECTION: This step involves gathering information on ML/FT cases, including the methods and techniques used, the individuals and organizations involved, and the types of illegal activities that generated the proceeds.
  2. ANALYSIS: The data collected is analyzed to identify patterns and trends, such as the common methods and techniques used, the types of individuals and organizations involved, and the characteristics of the illicit activities.
  3. CATEGORIZATION: The methods and techniques used are categorized into different typologies based on the analysis. For instance, the so-called Smurfing typology involves using multiple individuals to conduct small cash transactions to avoid detection.
  4. DEVELOPMENT OF STRATEGIES: The information gathered and analyzed is used to develop policies and strategies to combat ML/FT, which may involve the creation of new laws and regulations, the implementation of new technology, or the training of law enforcement and reporting entities

The TBA has several benefits over other approaches to combat ML/FT. First, it enables the identification of new and emerging methods, which is crucial given the constantly evolving nature of ML/FT. Second, it facilitates the development of targeted strategies and policies to combat specific types of ML/FT, allowing for more effective and efficient measures to be taken. Last, it promotes international cooperation in the fight against ML/FT, which is essential given the global nature of these issues.

In conclusion, the Typology-Based Approach is a vital tool in the fight against ML/FT. By identifying and categorizing new and emerging methods and developing targeted strategies and policies, it enables effective prevention and detection of ML/FT, while international cooperation ensures a coordinated approach to tackling these global problems.

AML/CFT Training Center Financial Forensic Services

The Risk Based Approach (RBA) is a well-established method for addressing the issues of money laundering and financing of terrorism (ML/FT), and is often discussed in traditional AML/CFT training sessions. It is widely recognized as an effective approach to combating ML/FT, and it has been adopted by financial regulators and reporting entities worldwide, including the Financial Action Task Force (FATF).

Reporting entities, such as financial institutions, legal professions, and cipher professions are considered as the gate-keepers to the global financial and economic system, and can implement various measures to combat ML/FT, including the RBA.

The RBA involves a framework for identifying, assessing, and managing money laundering and financing of terrorism risks by reporting entities. It requires the implementation of policies, procedures, and controls that are proportional to the level of risk posed by a particular customer, transaction, product, or service. The RBA recognizes that not all customers and transactions are the same, and that some may pose a higher risk of ML/FT than others.

For instance, a high-net-worth individual operating in a high-risk industry, such as gambling or real estate, may pose a higher risk of ML/FT than a low-risk individual operating in a low-risk industry, such as retail. Reporting entities are expected to identify and assess the risks associated with their customers, products, and services and implement controls that are proportionate to those risks. This includes conducting customer due diligence, ongoing monitoring, and enhanced due diligence for high-risk customers and transactions.

The RBA is not a one-size-fits-all approach, and reporting entities are expected to tailor their AML/CFT policies, procedures, and controls to their specific risk profile. This requires a thorough understanding of the risks associated with their business and the markets in which they operate.

To summarize, the risk-based approach is an effective framework for identifying, assessing, and managing ML/FT risks in financial institutions. It recognizes that not all customers and transactions are the same and requires financial institutions to tailor their AML/CFT policies, procedures, and controls to their specific risk profile. Reporting entities are expected to continuously assess and update their AML/CFT policies, to reflect changes in the risk environment, and the RBA is widely adopted by financial institutions and regulators worldwide.

CONCLUSION

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As previously mentioned, utilizing a Risk Based Approach alone may not be sufficient in combating ML/FT. Instead, a complementary approach known as the Typology Based Approach can be implemented to identify ML/FT. For instance, if a Politically Exposed Person (PEP) is identified by using the RBA, they would be labeled as a High Risk individual. However, if the PEP engages numerous international financial transactions, it becomes necessary to report them to the Financial Intelligence Unit (FIU). To do so, it is imperative to have knowledge of ML/FT indicators and techniques, as failing to detect such indicators could result in missed opportunities for reporting suspicious activity. Thus, understanding these indicators and techniques is crucial in identifying instances of ML/FT.