Understanding Geographic Risk and Non-Reputable Jurisdictions
In the context of anti-money laundering and combating the funding of terrorism (AML/CFT), geographic risk is an important factor when assessing customers, transactions and business relationships. One important geographic risk factor relates to non-reputable jurisdictions, which are jurisdictions that may present elevated money laundering and funding of terrorism (ML/FT) risks due to deficiencies in their AML/CFT framework.
The Prevention of Money Laundering and Funding of Terrorism Regulations (PMLFTR) define a non-reputable jurisdiction as a jurisdiction having deficiencies in its national AML/CFT regime or having inappropriate or ineffective measures for the prevention of money laundering and funding of terrorism. In determining whether a jurisdiction is non-reputable, regard is given to accreditation reports, declarations, public statements and other publications issued by the Financial Action Task Force (FATF), MONEYVAL and other FATF-style regional bodies. The definition also includes jurisdictions identified by the European Commission as high-risk third countries in accordance with Article 9 of Directive (EU) 2015/849.
Understanding and identifying exposure to non-reputable jurisdictions is an important aspect of applying a risk-based approach to AML/CFT compliance.
Non-Reputable Jurisdictions as a Geographic Risk Factor
Jurisdictions with deficiencies in their AML/CFT framework may present an increased risk that funds linked to money laundering, funding of terrorism or other criminal activity enter the financial system without being adequately detected or scrutinised.
For this reason, international organisations such as FATF regularly assess jurisdictions and publish findings relating to deficiencies in national AML/CFT frameworks. The European Commission also identifies high-risk third countries with strategic deficiencies in their AML/CFT regimes .
The presence of a customer, beneficial owner, counterparty or source of funds linked to a non-reputable jurisdiction does not automatically indicate criminal activity. However, it represents a risk factor that should be appropriately identified, assessed and considered when determining the level of due diligence and monitoring required
What Does This Mean for Businesses?
Businesses are expected to consider geographic risk as part of both their Business Risk Assessment (BRA) and Customer Risk Assessment (CRA). Exposure to non-reputable jurisdictions should be identified, documented and assessed within the broader context of the customer relationship and the risks associated with it.
Factors that may indicate increased geographic risk include:
- Customers resident or established in non-reputable jurisdictions.
- Beneficial owners located in non-reputable jurisdictions.
- Source of funds or source of wealth originating from non-reputable jurisdictions.
- Transactions involving banks, intermediaries or counterparties located in such jurisdictions.
- Business activities, investments or assets linked to such jurisdictions.
- Frequent payments to or from non-reputable jurisdictions.
Where increased geographic risk is identified, businesses should ensure that the relationship or activity is assessed and managed in accordance with applicable AML/CFT obligations. Any measures adopted should be proportionate to the nature and level of risk identified and aligned with the requirements established under the relevant legal and regulatory framework.
Businesses should also ensure that their risk assessment processes take account of updates published by FATF, the European Commission and other relevant international bodies. Given that such assessments are reviewed and updated periodically, geographic risk should form part of ongoing monitoring and periodic reviews of the business’s AML/CFT framework.
Conclusion
Geographic risk is a fundamental component of the risk-based approach to AML/CFT compliance. Non-reputable jurisdictions represent an important geographic risk factor that businesses should consider when assessing customers, transactions and business relationships.
While a connection to a non-reputable jurisdiction does not automatically indicate money laundering or funding of terrorism concerns, it is a risk factor that should be appropriately identified, assessed and considered within the broader context of the customer relationship.
By maintaining awareness of international assessments and applying proportionate risk mitigation measures where appropriate, businesses can strengthen their AML/CFT framework and support effective compliance with their regulatory obligations.
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Disclaimer: This article is intended for informational purposes only and does not constitute legal, regulatory or compliance advice. Readers should consult the applicable legislation, regulatory guidance and seek professional advice before taking any action based on the information contained herein. Information contained in this article is accurate to the best of our knowledge at the time of publication. However, legislation, regulations, regulatory guidance, industry standards and supervisory expectations may change over time. Readers should consult the latest applicable legal and regulatory sources and obtain professional advice before taking any action based on the information provided in this article.
