1. Utrecht School of Economics Tackling Money Laundering – Conference
Rule-Based vs. Risk-Based approaches to control. The third EU AML/CFT Directive.
Paolo Costanzo
European Commission
Utrecht, 3 November 2007

2. RULE – BASED VS. RISK - BASED
The two approaches to AML implementation and
compliance confront each other in the international
scenario.
This could favour:
Discrepancies in the regulatory framework
Difficulties in cross-border situations (for covered entities; for competent authorities)
Which of the two approaches is more cost-effective?

3. Rule – based approach. The features
Relevant measures or behaviours are pre-determined by rules
given the same “triggering events” (e.g. transactions over a threshold), the same behaviours apply in all situations
Compliance is achieved when pre-determined behaviours are adopted, regardless of their suitability (“formal” component)
No or little discretion in adapting the measures to the concrete case (equal treatment of different situations)

4. Risk – based approach. The features
Behaviours differ from case to case, depending on the risk
Given the same “triggering events”, situations may be treated differently (different treatments for different situations)
Compliance means exercising discretion in determining the most appropriate measures in light of the risk
Compliance is achieved when the risk is tackled appropriately; examples set out in the rules are not exhaustive (“substantial” component)
“High-level” legislation; extensive scope for guidance

5. THE IMPLEMENTATION OF THE NEW AML SYSTEM
From 2003: convergence toward the risk-based
approach to anti-money laundering
2003 FATF revised Forty Recommendations
EU third anti-money laundering Directive (2005/60/EC)
However, the rule – based approach is not entirely
ruled – out

6. THE STATE OF PLAY IN THE EU
19 EU Member States evaluated in the “third round” of mutual evaluations (10 by the FATF, 9 by MoneyVal)
15 December: deadline for the implementation of the third Directive
Problematic areas include risk-based issues, like:
Overall Customer Due Diligence regime
Politically Exposed Persons
Correspondent banking relationships

7. Cost-effectiveness. Elements for a comparison
Rule – Based approach
Risk – Based approach
PROs
CONs
Certainty
Allocation of resources
Flexibility
Complexity
Easy compliance
Deterrence and prevention
Uncertainty
Easy controls
Rigidity
Active participation of covered entities
Variation in time and space

8. Cost – effectiveness. Elements for a comparison (2)
Rule – Based approach
Risk – Based approach
Cost Effectiveness
In the transitional period:
Cost Effectiveness
In the longer run:
Cost Effectiveness

9. How to ensure effectiveness and measure it?
EX ANTE: shaping an effective risk – based AML system
Need for an overall risk/threat assessment (at the country level)
Understanding the economics of money laundering is of particular importance
EX POST: measuring the effectiveness of the system
The “embedded” tool provided for by article 33 of the third Directive: maintaining statistics to review the effectiveness
Understanding the economics of anti – money laundering is crucial to calculate costs and assess benefits with appropriate methodologies

10. Conclusions
The change over to a risk-based approach is expected to improve the effectiveness proportionally more than the costs
The risk – based anti – money laundering system requires:
To be shaped appropriately taking accounts of relevant threats
To be assessed in its effectiveness on a continuous basis
Appropriate tools should be identified to fulfil these tasks
Understanding the economics of money laundering and assessing the cost of compliance with AML/CFT measures are key

11. Thank you for your attention.