Blockchain Ireland Week 2023
Choosing an appropriate Country Risk Model is an essential part of effectively combating potential money laundering & terrorist financing. This article serves to provide what to look for when choosing a Country Risk Model.
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.
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.
Even if one knows the model’s data sources, is it clear how they are being used to generate risk ratings?
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.
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.
The Country Reports on Terrorism provide a complete annual report on terrorism for countries and groups around the world.
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 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.
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.
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.