K. JIA ET AL.
Inherent Risk (IR, B1)
IR is the susceptibility of a financial institution to money
laundering occurred given inherent and environmental charac-
teristics, but without regard to the internal control structure. IR
comprises a number of elements among which the following
three are the most significant.
The size of the institution (C1). A multi-national bank has a
higher possibility of being misused in laundering money
than a local saving bank (Reserve Bank of New Zealand,
2011). Although the measurements of institution size are
various (e.g. by asset, capital, revenue, profit, employee
number or branch number, etc.), the number of customers is
the most relevant indicator in analyzing the interaction be-
tween size and MLR of an institution because all money
launderings are eventually committed by “customers”, and
thus could be used here to define the size of institution.
The geographic location of the institution (C2). This ele-
ment actually concerns where the customers come from. In-
stitutions operating in the regions with high crime rate
would face more potential money-launderers and thus have
higher MLR (Federal Financial Institutions Examination
Council, 2010).
The business nature of the institution (C3). Institutions with
high proportion of cash deposit or withdrawal, cross-border
wire transfer and non-face-to-face businesses are normally
more vulnerable to money laundering. (Council of Europe,
2010).
Control Risk (CR, B2)
CR is the risk that money laundering may occur and not be
prevented or detected on a timely basis by the internal control
structure of the institution. CR is determined by the factors
inside an institution and can be controlled by the institution.
This paper identified the following seven fundamental factors
which directly affect CR level and from which other inside
factors are derived (Ma, 2009).
Management attitude and knowledge (C4). Reviewers can
assess the senior executives’ attitude and knowledge about
AML by interviewing the executives as well as the em-
ployees or by checking the written responsibilities of the
executives.
Procedures and measures (C5). Reviewers can assess the
validity of the AML procedures and measures in an institu-
tion by off-site reviews.
Computer system (C6). The two core roles that the computer
system is expected to play in the AML structure of an insti-
tution are storing customer identification information and
transaction records and analyzing abnormal transactions.
On-site test is needed to assess the efficiency of the AML
computer system in an institution.
Resources allocated (C7). The resource allocated in AML
can be measured by the total working hours of all AML
staff in the institution or the amount of funds spent on
AML.
Performance of customer due diligence (C8). On-site in-
spection is needed to assess whether the performance of
customer due diligence regulatory requirements or internal
procedures are fully implemented within an institution, in-
cluding identifying and verifying the identity of the cus-
tomer and the beneficial owner, recording the basic identity
information of the customer, and so on.
Performance of suspicious transactions report (C9). On-site
inspection is needed to assess whether STR regulatory re-
quirements or internal procedures are fully implemented
within an institution, including analyzing abnormal transac-
tions, filing reports and making them to the financial intel-
ligence unit.
Trainings (C10). To be assessed by interview or examina-
tion.
Making Pair-Wise Comparisons and Obtaining the
Judgmental Ma t ri x
After building AHP model, the priorities have been decided.
Elements are compared pair-wise and judgments on compara-
tive attractiveness of elements are captured using the traditional
9 rating scale, with 9 indicating “extreme importance”, 7 indi-
cating “very strong or demonstrated importance”, 5 indicating
“strong or essential importance”, 3 indicating “fairly impor-
tance”, 1 indicating “equal importance” when give the intensity
of importance. Scores of 2, 4, 6, 8 demonstrate intermediate
values and reciprocals show inverse comparison.
16 experts were invited to give the relative importance, and
for the convenience of calculation, the average value is round
number.
Results and Discussion
Pair wise comparisons are carried out with AHP software
and the result is shown as Table 1.
As indicated by the table, with less one third contributed by
IR (B1, 30.2%) and most proportion determined by CR (B2,
69.8%), the ML is basically “controllable” provided that the
institution has a strong internal control system. Reviewers
should thus focus more attentions on the CR control of a finan-
cial institution. Regarding the lowest hierarchy of factors, the
primary task for a financial institution in mitigating MLR is to
strictly conduct Performance of customer due diligence (C8,
19.1%) and Performance of suspicious transactions report (C9,
17.3%) measures, and supports from management (C4, 9.4%) is
also considerable important followed by valid internal rules (C5,
9.1%). Although not controlled by the AML arrangement of the
institution, the size of the institution also plays a significant role
(C1, 15.9%) in determining the MLR of the institution.
Table 1.
The weights of MLR factors.
1st
hierarchy 2nd
hierarchy Weights
to 1st 3rd
hierarchy Weights
to 2nd Weights
to 1st
C1 0.525 0.159
C2 0.200 0.060 B1 0.302
C3 0.275 0.083
C4 0.134 0.094
C5 0.131 0.091
C6 0.072 0.050
C7 0.074 0.052
C8 0.273 0.191
C9 0.248 0.173
A
B2 0.698
C10 0.068 0.047
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