Technology and Anti-Money Laundering
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Technology and Anti-Money Laundering

A Systems Theory and Risk-Based Approach

Dionysios S. Demetis

This insightful book examines the influence of information systems on anti-money laundering (AML). It builds on systems theory in order to develop a coherent theoretical framework that can be used for AML research.
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Chapter 6: The Risk-based Approach and a Risk-based Data-mining Application

Dionysios S. Demetis

Extract

6. The risk-based approach and a riskbased data-mining application1 The introduction of the risk-based approach has undoubtedly been one of the most important regulatory steps that have been taken for the improvement of AML. In this final chapter, a deconstruction of the risk-based approach is provided and it is related to the text of the European Union’s 3rd AML Directive (EU 2005). The deconstruction method uses systems theoretical ideas and Luhmann’s application of systems theory on risk. Other key systems theoretical concepts are also used from the descriptions provided in the previous chapters. Before considering risk in the context of AML, it is important first to reflect on both the nature of risk itself and the way it is observed. With risk being an important concept that is used in the vast majority of financial and other institutions, it is vital that the widespread misunderstanding in the way risk is perceived, represented and handled is exposed. DECONSTRUCTING RISK Risk is a subtle and elusive entity. Any representation of risk, and hence any attempt to break up risk into sub-categories, as in the so-called riskbased approach, requires the active involvement of an observer. Two broad types of risk can be practically distinguished, namely (i) ‘taking a risk’, where an action is taken in search of opportunities, but with the possibility of facing hazards, and (ii) ‘being at risk’, where outside forces threaten. In both cases there is a fundamental problem: by necessity the observer must start in a state of uncertainty,...

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