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DEFINITION

Risk Management (RM)

Risk Management (RM) refers to the process of identifying, assessing, mitigating, monitoring and reporting on risks that could negatively affect a given business. The risk could relate to financial loss, operational disruption, or reputational damage. Risk management also directly relates to regulatory compliance, with a risk-based approach being mandatory under AML and CFT frameworks.

Related article: Third-party risk management.

Synonyms

Risk mitigation, risk control

Acronyms

RM

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Synonyms

Risk mitigation, risk control

Acronyms

RM

Examples

For financial institutions, risk management is largely covered under Know Your Customer (KYC) and Know Your Business (KYB) frameworks. Namely, KYC/KYB dictates that financial institutions must adequately identify and verify their customers, check for any red flags (such as whether they are under sanctions), and monitor their account for suspicious behaviour. All of these actions allow financial institutions to identify and manage the risk customers may present in accordance with their risk appetite.

Risk management in this context is typically handled by advanced KYC/KYB software that leverages automation, AI, and rule-based decisioning to quickly and effectively establish risk profiles of different customers and proceed accordingly. Depending on their risk profile, customers deemed a high risk may just be monitored more closely or they might even deny their services.

FAQ

The key components of risk management are: risk identification, risk assessment, risk mitigation, risk monitoring, and reporting.

By leveraging technologies such as AI and automation, financial institutions can improve risk detection, streamline their processes, execute decisions consistently in accordance with predefined rules, and provide real-time data analysis.

Some regulations, such as AML and CFT, require that financial institutions properly manage customer risk in order to more effectively combat financial crimes such as money laundering and the financing of terrorism.

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