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What is the importance of a Business Risk Assessment (BRA)? How can a legal entity conduct the BRA; and what should they look out for? This article explains the ins and outs of the BRA and why it is important to your business. MK Compliance offers an all-inclusive service when it comes to the BRA and other Compliance Services. Contact us on email@example.com or phone +356 2016 1010.
What is Risk Management?
The identification, evaluation, monitoring, and improvement of the risk mitigation process in the company environment are all made possible by risk management, a crucial business activity. All sizes of firms engage in risk management; small businesses do it formally, whereas enterprises formalise it. As they expand, businesses want to guarantee stability. A crucial component of this stability is effectively managing the risks that the company is facing. The firm may suffer losses if it is unaware of the risks that could negatively impact its operations. Loss of market share, financial losses, and accidents can all occur from not being aware of various risks. For example, not being aware of a competitive risk might result in market share loss.
Why does a business need to carry out a Business Risk Assessment (BRA)?
The carrying out of a Business Risk Assessment (BRA) is an obligation that came into force as from 1st January 2018 and stems from Regulation 5(1) of the Prevention of Money Laundering and Funding of Terrorism Regulations and Section 3.3 of the FIAU Implementing Procedures Part I (IPs).
What is a Business Risk Assessment?
A BRA is the foundation of the risk-based approach which allows the subject person to ensure that the current business model is in line with its risk appetite. This is carried out by the implementation and application of anti-money laundering and combating the funding of terrorism measures. It is necessary to ensure that the required resources are applied in areas where there is a higher risk than usual of ML/FT.
What is the purpose of the BRA?
Business Risk Assessment
The BRA’s purpose is to make it possible to determine the potential AML/CFT risks that a business may face when conducting a relevant activity as defined by the Prevention of Money Laundering and Funding of Terrorism Regulations and the IPs. This is required to make sure that resources are allocated to the areas where the danger of ML/FT is higher than usual. For instance, it makes sense that stronger controls should be used when providing a product that is more sensitive to ML/ FT if a subject person offers multiple different product kinds. These measures should thus be better tailored to address and reduce the specific risk noted. However, this cannot be implemented successfully unless the subject person determines and evaluates its exposure to ML/FT hazards and is aware of the different risks and their potential manifestations. Therefore, conducting a successful BRA serves as the primary basis for directing resource-allocation as well as the amount, timing, and type of controls which are to be in place.
A company’s risk-based strategy entails the identification, recording, and evaluation of the risks that it must handle in its capacity as a subject person. When interacting with clients with the potential aim of money laundering or terrorist financing, the company must identify and evaluate the risks involved. The appropriate procedures and strategies that must be used to mitigate and manage risk are determined by the specific circumstances of the subject person.
A subject person is able to identify the risks it is exposed to and rate such risks should no controls be applied. This is done by analysing how likely such an event could take place and the impact the risk event would have should it transpire. This is known as the inherent risk. Having done so, the subject person must then determine the controls it has in place to mitigate these risks and how strong such measures are in combating the risk of ML/TF (effectiveness). The end result is known as the residual risk, which should reflect the actual risk exposure of a subject person and should also be in line with the subject person’s risk appetite. If this is not the case, then adjustments must be made to bring these two factors in line with each other.
How should a Business Risk Assessment be conducted?
The process by which the subject individuals conduct their risk assessment must be described in the BRA itself (methodology). Additionally, it is necessary to provide a clear and acceptable approach that outlines how to evaluate the likelihood and impact of the identified risks as well as the efficacy of the corresponding controls. Subject persons incur the danger of obtaining erroneous results, and consequently an inappropriate assessment of risks and controls in the absence of a clear step by step procedure. Due to this, subject persons may mistakenly ignore regions that pose substantial ML/FT dangers. This could also result in focusing on areas that are wrongly identified as having high ML/FT risks, wasting resources.
How does a BRA cater for different client needs?
Business Risk Assessment
The BRA is a tailor-made document that reflects the client’s business model, operations and scenarios. This is done by identifying and assessing all evident risks which the subject person is mainly involved in. The following is a step by step procedure to creating an effective BRA:
- Establishing a goal – This is important for the business-client relationship to be able to understand what the client wants whilst building a safeguarding mechanism.
- Identifying risk areas – Identifying the risks that the business is exposed to in its operating environment such as legal risks, environmental risks, market risks or regulatory risks.
- Analysing the different types of risk areas – The scope of the risk must be determined. It is important to understand the link between the risk and the different factors within the organisation. It is important to determine the severity of the risk to be able to see how many business functions the risk affects.
- Evaluating/Ranking the risks – Ranking risks is important because it allows the organisation to gain a holistic view of its risk exposure in totality. A business may be vulnerable to several low-level risks, however it may not require upper management intervention. On the other hand, just one of the highest rated risks is enough to require immediate intervention.
- Strategy Plan – Once a risk is identified, it must be eliminated or contained as much as possible. Discussions regarding the risk and its possible solution must be made in order to arrive at a plan capable of minimising the risk.
- Monitoring and reviewing the risks – Monitoring risks allows your business to ensure continuity.
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Why Choose MK Services
A properly-executed BRA is quintessential since it forms the basis for all policies and procedures a subject person has in terms of AML/CFT and overall regulatory compliance. It assists the subject person in allocating the required resources more efficiently to address the areas which pose a higher risk and will help the subject person in having greater peace of mind that their products or services are not being used for ML/TF purposes. It also reduces the risk of regulatory fines and other reputational damage.
Michael Kyprianou Services is a firm that has garnered a wealth of knowledge and extensive experience in AML/CFT, Business Risk Assessments and Compliance services. Have a look at our risk-mitigating services, or Contact us directly to get your tailored assistance: firstname.lastname@example.org
The content of this article is valid as at the date of its first publication. It is intended to provide a general guide to the subject matter and does not constitute legal advice. We recommend that you seek professional advice on a specific matter before acting on any information provided. For further information, please contact us at MK Fintech Partners via email at email@example.com or by telephone +356 2016 1010.