Money Laundering and Major Risks

The concept of money laundering is very important to be understood for those working in the financial sector. It is a process by which dirty money is converted into clean money. The sources of the money in actuality are criminal and the money is invested in a way that makes it look like clean money and hide the identity of the criminal part of the money earned.

While executing the financial transactions and establishing a relationship with the new customers or maintaining existing customers the duty of adopting adequate measures lie on everyone who is a part of the organization. The identification of such elements, in the beginning, is easy to deal with instead of realizing and encountering such situations later on in the transaction stage.

The central bank in any country provides complete guides to AML risk management solution and CFT to combat such activities. These policies when adopted and exercised by banks religiously provide enough security to the banks to deter such situations.

However, if a bank encounters any such situation it encounters the following types of consequences:

Reputational risk

The major risk a bank faces when it finds itself caught in any sort of money laundering is reputational risk. The reputation of the bank goes negative and in turn, it might face huge withdrawals. There might be a loss of profitable business and many other liquidity issues. The quantum of this risk might cause a bank to confront various investigations costs and penalties. The biggest hurdle a bank has to undergo is the situation of mistrust by the customers which is devastating.

Operational risk

It is another one of the major consequences of money laundering that a financial institution faces. It is a kind of risk that lies in the internal procedures, people, and system after they break down. It is a risk that is included in the operations of the business. Thus it creates a disturbance in the smooth functioning of the organization.