🔹 Definition
Jurisdiction Risk refers to the inherent level of money laundering, terrorism financing, sanctions, or regulatory risk associated with doing business in, or with entities from, a particular country or territory. It is a core component of any risk-based approach (RBA) to compliance and plays a critical role in customer due diligence (CDD), transaction monitoring, and enhanced due diligence (EDD) processes.
Jurisdiction risk is influenced by a country’s legal framework, political stability, transparency, FATF status, and track record in combating financial crime.
🔹 Frequently Asked Questions (FAQs)
Q1: What factors contribute to jurisdiction risk?
- Inclusion on the FATF Grey or Black List
- Presence of weak AML/CFT regulations or enforcement
- High levels of corruption or political instability
- Secrecy laws that shield beneficial ownership
- History of sanctions violations or financial crime exposure
- Use of the jurisdiction as a hub for offshore finance, tax evasion, or shell companies
Q2: How is jurisdiction risk assessed in compliance programs?
- Assigning risk scores to countries in the KYC and onboarding process
- Using publicly available sources such as:
- FATF evaluations
- Transparency International’s Corruption Perceptions Index (CPI)
- Basel AML Index
- EU high-risk third country lists
- Monitoring geolocation data, IP addresses, or payment routes in real-time systems
Q3: What are the compliance implications of high-risk jurisdictions?
- Triggering enhanced due diligence (EDD)
- Increased monitoring frequency and alert sensitivity
- Restricting or prohibiting certain business activities or customer types
- Mandatory senior management approval for onboarding or continued engagement
- Filing Suspicious Transaction Reports (STRs) more proactively
Q4: How often should jurisdiction risk lists be updated?
Best practice requires continuous monitoring with formal reviews at least annually, or immediately after:
- Regulatory changes (e.g., FATF list updates)
- Geopolitical developments (e.g., sanctions, conflicts)
- Internal audit or risk committee recommendations
Q5: What’s the difference between jurisdiction risk and country risk?
- Jurisdiction Risk focuses on AML/CFT, sanctions, and compliance exposure
- Country Risk is broader and may include economic, sovereign, and political risk for investment or credit decisions
