The Risk-Based Approach to AML Compliance in Malta

Introduction to the Risk-Based Approach in Malta’s Financial Sector

The Risk-Based Approach (RBA) is a cornerstone of modern Anti-Money Laundering (AML) and Counter-Terrorist Financing (CFT) frameworks, particularly in Malta. Financial institutions and subject persons in Malta must align with global AML standards while considering local regulatory nuances. The Financial Intelligence Analysis Unit (FIAU) and Malta’s Prevention of Money Laundering and Funding of Terrorism Regulations (PMLFTR) provide the foundation for RBA implementation. The key objective is to ensure that AML resources are directed where the risks are highest, thereby improving efficiency and effectiveness.

Regulatory Framework Supporting the Risk-Based Approach in Malta

FATF Guidelines and EU AML Directives

The Financial Action Task Force (FATF) outlines the global standards for AML compliance, emphasising a risk-based approach to combat money laundering and terrorist financing. Similarly, the EU’s Fourth AML Directive (4AMLD) (Directive (EU) 2015/849) underscores the need for evidence-based decision-making in identifying and mitigating AML risks. Malta, as an EU member state, has incorporated these directives into its national framework through the PMLFTR and FIAU’s Implementing Procedures.

FIAU’s Role in Malta’s Risk-Based Approach

Malta’s Financial Intelligence Analysis Unit (FIAU) plays a crucial role in enforcing AML regulations. The FIAU ensures that financial institutions and other regulated entities adopt Business Risk Assessments (BRA) and Customer Risk Assessments (CRA), aligning with international best practices. These assessments help institutions understand and categorise risks effectively, implementing appropriate Customer Due Diligence (CDD) measures accordingly.

Core Components of the Risk-Based Approach in Malta

1. Risk Identification

Entities in Malta must first identify the risks of money laundering (ML) and terrorist financing (TF) they are exposed to. These risks arise from various sources, including:

• Nature of financial transactions (e.g., high-value transfers, cryptocurrency dealings)
• Geographic exposure (e.g., clients from high-risk jurisdictions)
• Customer profiles (e.g., Politically Exposed Persons (PEPs) and businesses dealing in high-risk industries)

2. Risk Assessment and Understanding

Once identified, institutions must assess and understand these risks by considering likelihood and impact. Malta’s Risk Factor Guidelines (2017) highlight two primary components:

• Likelihood: Probability of an entity being used for ML/TF
• Impact: Consequences of ML/TF occurring

3. Implementation of Risk-Mitigation Measures

The mitigation strategy must be proportionate to the level of risk. Malta’s regulatory framework mandates that firms establish policies, procedures, and controls tailored to the risk levels identified. These measures include:

• Customer Due Diligence (CDD): Identifying and verifying customer identities
• Transaction Monitoring: Detecting suspicious activities through ongoing surveillance
• Internal Controls and Compliance Functions: Ensuring compliance with AML laws through governance structures

Binderr’s risk assessment solution delivers customisable, AI-based risk scores that allow businesses to tailor their AML measures in line with their specific risk appetite. Financial institutions in Malta benefit from detailed insights that help them not only identify high-risk transactions but also implement targeted enhanced due diligence (EDD) measures where needed. By centralising all aspects of screening, monitoring, and risk assessment into one intuitive dashboard, Binderr streamlines compliance workflows—saving time, reducing costs, and safeguarding both reputation and operations.

Levels of Customer Due Diligence (CDD) in Malta

Malta’s Implementing Procedures – Part I set out various levels of CDD, depending on the risk level assigned to a customer or transaction.

1. Simplified Due Diligence (SDD)

SDD applies when a business relationship or transaction presents a low risk of ML/TF. However, even in these cases, institutions must still:

• Identify and verify the customer: This involves obtaining basic identification details such as name, date of birth, and nationality, supported by valid documentation like a passport or national ID.
• Conduct periodic monitoring to ensure risk remains low: Even when a customer is deemed low-risk, financial institutions in Malta must conduct ongoing checks to confirm that the risk profile remains unchanged. This includes reviewing transactional behaviour and ensuring no suspicious activity arises over time.

2. Standard Due Diligence (CDD)

Most customers and transactions in Malta fall under standard CDD requirements, which involve:

• Verifying the customer’s identity through official documentation: Institutions must obtain official identification, such as a government-issued ID or passport, along with proof of address and, where applicable, business registration documents for corporate entities.
• Understanding the nature of the business relationship: This includes assessing the purpose of the transaction, expected transactional patterns, and identifying potential risk factors.
• Conducting ongoing monitoring: Continuous review of transactions and account activity is necessary to detect inconsistencies or unusual patterns that could indicate potential ML/TF activities.

3. Enhanced Due Diligence (EDD)

EDD is required for high-risk customers or transactions. Situations where EDD is mandatory include:

• High-risk jurisdictions (e.g., countries flagged by the FATF): Customers from jurisdictions with weak AML frameworks or those under FATF scrutiny require heightened scrutiny.
• Politically Exposed Persons (PEPs): Individuals in prominent political or public positions, or their close associates, require additional due diligence due to their potential exposure to corruption risks.
• Complex or unusual transactions: Transactions involving large sums, complex structuring, or unclear economic purposes may trigger EDD.

Enhanced measures involve:

• Collecting additional information about the customer’s source of wealth: Institutions must ascertain the legitimacy of the customer’s financial standing, requiring documentary evidence such as tax returns, property deeds, or company financial statements.
• Increasing transaction monitoring: High-risk customers require more frequent reviews and real-time transaction monitoring to detect anomalies.

Conducting more frequent compliance reviews: Institutions must reassess high-risk customers periodically, ensuring any changes in risk profile are promptly addressed.

Binderr’s platform facilitates real-time monitoring of customer activities, ensuring that any potential money laundering or terrorist financing risks are flagged immediately. With automated screening against global watchlists—including sanctions, politically exposed persons (PEPs), and adverse media—the solution enables institutions to maintain up-to-date risk profiles effortlessly. This means that even in a highly regulated market like Malta, organisations can rely on Binderr to perform rapid, accurate checks, reducing manual errors and enhancing overall efficiency.

Customer Risk Assessment in Malta’s AML Compliance Framework

1. Business Risk Assessment (BRA) vs. Customer Risk Assessment (CRA)

• BRA: A general evaluation of the ML/TF risks faced by an institution based on its size, customer base, and services offered. Institutions in Malta conduct BRA to understand the broad exposure to financial crime risks and establish appropriate mitigation strategies. This assessment informs the institution’s overall AML policies and controls, ensuring resources are allocated efficiently.
• CRA: A more specific evaluation focusing on the risk posed by individual customers or transactions. This involves assessing a customer’s background, nature of transactions, and financial history. The CRA helps determine whether a customer requires simplified, standard, or enhanced due diligence. Financial institutions in Malta use this process to assign risk ratings, which dictate monitoring intensity and compliance measures.

2. Factors Considered in Customer Risk Assessment

• Customer Profile: The nature of the client, including whether they are a Politically Exposed Person (PEP), a high-net-worth individual, or engaged in high-risk industries such as gambling or crypto-related services.
• Geographic Risk: Whether the customer operates in high-risk jurisdictions with weak AML frameworks or under FATF scrutiny. Customers from these regions may require additional due diligence and monitoring.
• Transaction Patterns: Frequency and volume of transactions, assessing whether they align with the customer’s stated business activities. Unusual transaction behaviour, such as sudden large deposits or frequent international transfers, may indicate a higher ML/TF risk.

The Role of Ongoing Monitoring in the Risk-Based Approach

For an RBA to be effective, institutions in Malta must establish robust monitoring systems to track customer activities and ensure compliance. Monitoring includes:

• Automated Transaction Screening: Identifying suspicious transactions in real time using AI-powered and rule-based detection systems.
• Periodic Reviews: Ensuring risk profiles remain up-to-date by reassessing customer data, transaction history, and emerging risks. High-risk customers require more frequent reviews.
• Independent Audits: Evaluating the effectiveness of risk mitigation measures through internal and external audits, ensuring compliance with FIAU regulations and international AML standards.

Ongoing monitoring is a critical component of Malta’s risk-based AML framework, helping financial institutions proactively detect and respond to money laundering and terrorist financing threats.

Future of the Risk-Based Approach in Malta

1. Evolution of AML Regulations

With the Fifth AML Directive (5AMLD) and Sixth AML Directive (6AMLD) introducing stricter requirements, Malta’s financial sector must stay ahead by:

• Strengthening Beneficial Ownership Registers
• Enhancing cross-border cooperation with EU regulators
• Adopting advanced AI-driven transaction monitoring tools

2. Addressing High-Risk Third Countries

Malta must ensure compliance with Article 18a of 4AMLD, which mandates stricter controls for businesses dealing with high-risk jurisdictions. This includes implementing mandatory EDD for customers from flagged regions.

Why the Risk-Based Approach is Essential for Malta’s Financial Sector

Adopting a Risk-Based Approach (RBA) is crucial for Malta’s financial institutions to remain compliant with FIAU guidelines, PMLFTR, and FATF recommendations. By prioritising resources where risks are greatest, institutions can:

• Improve AML efficiency and reduce regulatory burdens
• Strengthen customer trust and safeguard financial integrity
• Ensure continued compliance with EU and FATF regulations

Conclusion

The Risk-Based Approach (RBA) is a dynamic and essential component of AML compliance in Malta. By identifying, assessing, and mitigating risks effectively, financial institutions can protect themselves against money laundering and terrorist financing threats. With continuous regulatory advancements, businesses must remain proactive in refining their risk assessment frameworks to uphold Malta’s reputation as a well-regulated financial hub.

As Malta continues to position itself as a leading financial hub, adopting advanced tools such as Binderr’s comprehensive AML solution becomes crucial. The platform’s robust capabilities ensure that local institutions can meet the stringent standards set forth by the Financial Intelligence Analysis Unit (FIAU) and other regulatory bodies. In doing so, Binderr empowers Maltese financial institutions to focus on growth and innovation, while confidently managing compliance and risk.

With Binderr, Malta’s financial sector can embrace a future where cutting-edge technology meets regulatory excellence, ensuring that every client interaction is secure, efficient, and fully compliant with international AML standards. For those looking to transform their onboarding and compliance processes, Binderr offers the expertise and technological prowess needed to stay ahead in a rapidly evolving regulatory landscape.

Discover how Binderr’s market-leading platform can revolutionise your AML screening and risk assessment processes in Malta by booking a demo today!