To establish a successful counterparty risk management program, it is essential to focus on the five key pillars: Fundamentals, Counterparty Identification, Counterparty Due Diligence, Counterparty Monitoring, and Compliance Risk Reporting.
By clearly defining these steps, organizations can effectively manage costs and achieve scalability through automation, resulting in transparent processes and a robust audit trail.
In this article we are going to talk about the fundamentals, the first pillar of your compliance program. If you want to read about the other four key pillars, Get the Whitepaper: Setting Up a Robust and Automated Risk & Compliance Management Program
How do you define your risk appetite?
You have a risk appetite statement. This is a board-approved statement that delimits the nature, quality, and levels of risk that the business expects to manage.
This is based on what you anticipate your risk management capacity to be and what you anticipate the risks to be within your business.
This is critical and the cornerstone of your compliance program. You have your policies. You will have AML policies, sanctions policies, bribery and corruption policies, and all the other policies necessary to establish a baseline of roles and responsibilities, scopes, service levels, and standards and expectations within your compliance program.
You have your procedures, your detailed procedures that ensure a standardized, objective, reliable and measurable approach to your anti-money laundering compliance program.
And the most important, you have your people and your technology. They will determine the capabilities that you can bring to bear.
How to set yourself up for success? Recruit the best talent you can find. Give them the best tools for the job.
If you look at your risk appetite statement, the old way of doing this is to review the business capabilities and expected market.
You estimate the risks and define an RAS, which is put forward to the board and approved.
The new way of doing this is to define your RAS based on an empirical review of clients and products using automated capabilities and real-time processing that you can get from a system like KYC3.
Automate and fully digitalize your risk assessment system
Why should you develop an RAS that is based on measurable parameters from your clients, products, and markets? By using an automated and fully digital risk assessment system, you can validate the accuracy and adherence to your risk appetite
Step two, defining your compliance process.
The old way of doing this was to develop procedures and checklists that enable the RAS to be implemented in your organization. This would result in an operating manual detailing a system of elaborate procedures, and checklists, usually managed with tools such as Excel, Word, and email.
The new way of doing this is to configure your compliance process based on the limits of a dynamic and integrated digital system to digitize the entire process.
The digitalization delivers a standardized compliance process that is leaner, more agile, and much more efficient.
When we use automated and fully digital risk assessment systems, we can do more with less and we can adapt to regulatory changes quickly and inexpensively
Step three, ensuring that your risk assessment process is reliable.
The old way of doing this is to review the risk assessments to ensure that they are consistent and the risks are properly accounted for. This would result in the manual review of tests and testing of real cases to determine if the risk assessment process was correctly categorizing and assessing the risk.
The new way of doing this is to configure the risk assessment engine directly in the system and begin using it. Dynamically adjust the parameters so that the risk results filter into the correct risk levels automatically and risks are updated in real-time.
The new result means that once tuned, there’s no need to review the risk assessment process as a standardized digital process is delivering provably consistent results.
By using an automated and fully digital risk assessment system, you get a standardized, automated, and fully auditable risk assessment process.
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