AML Rules Put More Weight on Risk Judgment

The Federal Reserve’s proposed rules for anti-money laundering and countering the financing of terrorism, or AML/CFT, would give financial institutions more room to make risk-based judgments—and more responsibility to show those judgments are sound. 

The proposal keeps the basic AML/CFT program framework, but puts more pressure on whether a bank’s resources are aimed at the customers, activities, and controls that carry the greatest financial crime risk. Customer due diligence, monitoring, staffing, technology, and governance would all need to connect back to the institution’s actual risk profile. 

In a ProSight interview, John Arvanitis, managing director and financial crimes and fraud lead at Huron, said the proposal preserves the foundation of the current AML/CFT framework while signaling a change in supervisory expectations, examination focus, and enforcement priorities. The goal, he said, is to concentrate resources on activities that produce meaningful risk-management value. 

A few key points: 

Make risk decisions defensible. The proposal gives institutions more room to self-assess AML/CFT risk and resource allocation. That flexibility is useful because banks know their customers, products, operating models, and risk exposures. It also raises the bar for evidence. Arvanitis said examiners will still need to determine whether bank decisions are grounded in “sound methodology and credible evidence.” 

Revisit customer due diligence. Arvanitis said ongoing customer due diligence could move from a largely process-driven exercise to “a truly risk-driven discipline.” That may require institutions to redesign customer risk-rating methodologies, improve risk differentiation, and align due diligence requirements more closely with actual financial crime exposure. 

Look at where resources are going. The proposal encourages institutions to shift attention away from lower-risk activity and toward higher-risk customers, emerging threats, advanced analytics, and program innovation. Arvanitis cited potential benefits including more effective transaction monitoring through appropriately calibrated model tuning and reduced defensive SAR filing where risk indicators do not justify escalation. The caution is that “risk-based” could become synonymous with “cost-based” if institutions use the framework to justify budget reductions or staffing cuts. 

Prepare for outcome-focused exams. The proposal says enforcement or supervisory action would focus on a “significant or systemic failure” to implement an established program. Arvanitis said the proposal suggests scrutiny may center on material weaknesses in program design, governance, or execution, rather than isolated procedural deficiencies with limited effect on overall program effectiveness. 

The takeaway: The proposal gives banks more room to use judgment, but that judgment has to be documented, tested, and tied to real financial crime risk. Strong governance, credible risk assessments, effective independent testing, and disciplined resource decisions will matter as much as the formal AML/CFT program structure.