High level jurisdiction risk assessments alone are often too broad in scope to include in anti-money laundering policies; Micro-jurisdictional risk analysis could help allay model bias.
Some aspects of AML policies and procedures are in need of an overhaul, to capture variables important to making accurate analysis
Low risk jurisdictions have high-risk neighbourhoods and, conversely, not all customers and transactions from high-risk jurisdictions warrant heightened scrutiny
Financial institutions should go beyond existing AML guidelines and apply a more granular risk-based approach to geography to stay ahead of upcoming best practices
Financial institutions tend to build their anti-money laundering (AML) frameworks based on regulatory guidelines and commonly accepted industry standards. This can include jurisdiction risk, a common input banks use when evaluating customers and their transaction activity to determine degrees of AML risk, or to identify suspicious activity. Jurisdiction risks are based on a number of factors, including links to sanctions, terrorism, narcotics, corruption and other legislative and government deficiencies. The problem with attempting to include jurisdiction risk in AML policies is that it is simply too broad in scope, ranging from entire countries to subcomponents of cities, which lends such analysis to be either overemphasised or underemphasised as a data input.
As an example, there is strong evidence from the US that crime often occurs in High Intensity Drug Trafficking Areas (HIDTA), given the link between violent crime, competing drug distributors, and addicts looking to finance their next fix. HIDTA is an example of a high-risk micro-jurisdiction within the US, and banks may factor this into their lending decisions.
By contrast, foreign micro-jurisdictions have generally not been a component of AML programmes because of the large number of geographic areas which would need to be monitored on an ongoing basis, and the difficulty of defining how a standard of a high-risk micro-jurisdiction could apply across the globe. This leaves a gaping hole in the AML process, which severely limits its potential global impact.