Your AML Risk Assessment Is Not an Audit (and why it matters)

Regulators Are Watching—And Fines Are Steep

Broker-dealers face steep consequences for anti-money laundering compliance failures. Regulators have imposed fines of up to $3 billion on some financial institutions for anti-money laundering (AML) failures, including failures that were the result of inadequate risk management. A common root cause? Many firms mistakenly equate their AML independent audits as the same thing as a risk assessment, creating potentially dangerous gaps in their compliance framework.

AML Risk Assessments vs AML Audits – What’s the Difference?

While AML audits evaluate how a firm manages its AML program in light of their Written Supervisory Procedures (WSPs), risk assessments focus more on identifying potential vulnerabilities. These distinct but complementary processes each play vital roles in a firm’s compliance strategy.

Failing to recognize these differences can result in compliance blind spots, overlooked warning signs, and regulatory penalties. This guide explores the essential distinctions between risk assessments and audits, common mistakes firms make when conflating these processes, and practical approaches to leverage both tools for more substantial compliance.

Effective AML compliance requires a precise understanding of how risk assessments differ from audits. Risk assessments try to anticipate potential threats before they emerge. Audits evaluate control effectiveness after implementation and typically with a defined scope of review and a time period.

Risk Assessments: A Forward-Looking View

Risk assessments provide the foundation for robust AML programs. Firms depend on these assessments to measure and document money laundering risks.  Each evaluation maps specific risk factors – investment products, services, client profiles, geographic exposure, cyber risks, etc. Consider risk assessments as predictive tools asking, “What risks lie ahead?”

Audits: A Retrospective Review of Controls

Independent AML Audits take a retrospective approach, determining whether existing controls perform as intended.  Their core purpose? To verify Bank Secrecy Act (BSA) compliance and assess AML program alignment with regulatory requirements.

When Are They Required?  Timing and Regulatory Expectations

Before a comprehensive AML compliance program can be developed, the first step is to develop a risk assessment.  This initial process takes time, resources, and unbiased scrutiny of a firm’s risks and controls. Once the initial framework of the risk assessment is completed, the amount of time and energy spent going forward is usually quite a bit less. Typically, whenever a firm makes any changes that impact its risk profile (new products or services, different client demographics, new technology, etc.), the firm should use that as an opportunity to make changes to their risk assessment. While no strict timeline exists, it is prudent to do this assessment as part of the due diligence process for new technology and services. Additionally, on an annual basis, firms should be reviewing the risk assessment to ensure all appropriate AML risks have been captured.

While a risk assessment is not strictly required by rule, many regulators view an AML Risk Assessment to be one indicator of a firm having a robust and mature AML program.

An Independent Audit, on the other hand, is required for all broker-dealers. Additionally, effective January 1, 2026, most RIAs will also be required to have an AML Independent Audit as well as other AML program requirements. Firms are required to have an independent AML audit conducted every year or every two years, depending on the custodial and trading profile of the firm.

Building the Right Team for Each Function

Risk assessments should be thought of as a broad collection of personnel. While the CCO, or someone within Compliance/Risk may spearhead the efforts, to develop an effective risk assessment firms should ensure they have participation from all major facets of the business.  This will ensure that the firm does not overlook operational, sales or other areas of risk. 

AML audits require genuine independence from assessed areas. Three groups typically perform these evaluations:

• Internal audit departments
• External consulting firms
• Legal counsel

Robust AML programs excel at both processes. Risk assessments inform future audit priorities, particularly in areas identified as high-risk. Working in tandem, these processes create a comprehensive defense against compliance vulnerabilities while ensuring regulatory adherence.

Core Components of an AML Risk Assessment

Risk Identification – Start with Strong Data

Quality data forms the foundation of effective AML risk assessments. Wealth management firms must derive actionable insights from both internal and external data sources to identify potential threats. Through sophisticated analysis, firms can evaluate clients’ potential involvement in illicit financial activities.

Key Risk Indicators (KRI)

Successful AML risk assessments center on several critical Key Risk Indicators (KRIs):

• Client categorization and profiles
• Operational scope, complexity, and scale
• Investment products and service offerings
• Geographic risk exposure
• Client due diligence protocols
• Cybersecurity Controls
• Physical Safeguards (building access, shredding protocols, etc.)
• Third party vendor risks

Tailoring to Your Firm’s Profile

The exact KRIs that form your risk assessment should be tailored to the specifics of your firm.  Online-based firms, for example, would have more cyber risk concerns than a firm that primarily operates from physical branches. This foundation enables comprehensive analysis of both inherent and residual AML risks.  Inherent risks – those existing before control implementation – warrant particularly thorough evaluation. 

Risk Scoring Methodology

Risk scoring brings quantitative rigor to threat evaluation. It is always recommended that firms come up with a numeric risk scoring methodology as opposed to a descriptive word (such as low, medium or high). A numeric score allows firms to conduct better data analysis than a descriptive word would allow. While the exact numerical score range depends on the firm, it is recommended that the firm consider a 1-5 risk score, with 5 being the highest risk indicator.

Once the inherent risk score is calculated, the firm then evaluates the residual risk using the same numerical score range as the inherent risk scores. A firm’s control effectiveness can then be classified as follows:

• Weak Controls: Residual risks that have a score between 4 and 5. This would indicate that the firm has limited risk mitigation.  
• Adequate Controls: Residual risks that have a score between 2 and 3. This would indicate the firm has satisfactory controls in place. 
• Strong Controls: Residual risks that have a score between 1 and 2. This would indicate that the firm has extremely strong risk mitigation protocols in place for the activity. 

Essential Elements of an Independent AML Audit

Scope and Objectives

Effective AML compliance depends on comprehensive independent testing.

AML audits extend beyond basic compliance verification. Auditors must conduct comprehensive evaluations of BSA/AML program effectiveness, examining policies, procedures, and control mechanisms. Each audit report must provide explicit conclusions regarding BSA regulatory compliance status.

Essential audit scope components include:

• AML Program Approval and Oversight
• Customer Identification Program (CIP)
• Office of Foreign Assets control (OFAC) Compliance
• Bank Secrecy Act (BSA) Compliance
• Financial Crimes Enforcement Network (FinCEN) Information Requests and Information Sharing
• Suspicious Activity Monitoring and Report Filings (SAR)
• AML Training
• Typically, the scope period is for the preceding 12 months.

Documentation – What Needs to Be Captured and Why

Documentation validates compliance efforts. Regulatory requirements mandate comprehensive audit records. Records must remain accessible for examiner review and demonstrating risk-appropriate testing coverage.

Critical documentation includes:

• Comprehensive scope and methodology
• Evidentiary support
• Board or Senior Management Communication of Findings
• Remediation tracking

Audit findings flow directly to board members or designated oversight committees. Board minutes must document senior management’s receipt of testing results.

Common Risk Assessment and Audit Mistakes

Timing and Frequency Errors

Timing mismanagement undermines compliance effectiveness. While Federal Financial Institutions Examination Council (FFIEC) guidelines recommend conducting risk assessments every 12 months, many firms extend these timeframes excessively. This creates widening gaps where deficiencies can proliferate.

Firms commonly struggle with:

• Extended audit cycles misclassified as monitoring
• Outdated risk assessments, despite operational changes
• Delayed remediation of identified issues

Resource Allocation

Financial crime operations require precise resource distribution. Many firms mismanage resources between risk assessment and audit functions, compromising their compliance framework.

Three primary challenges may emerge:

Staff Role Confusion

• Business and Compliance responsibilities overlap inappropriately
• Insufficient dedicated risk assessment personnel
• Compliance departments are overwhelmed by day-to-day operations

Operational Inefficiencies

• Manual systems are inundated with false alerts
• Limited personnel struggle to track regulatory changes
• Inadequate documentation compromise due diligence standards

Knowledge and Expertise Gaps

• Undertrained personnel struggle with sophisticated cases
• Limited financial crime expertise across organizations
• Training programs lag behind regulatory updates

Best Practices: Using Risk Assessments and Audits Together

While risk assessments with independent audits serve unique purposes, effective AML compliance integrates these tools. Strategic resource allocation maximizes both tools’ potential. Firms need dedicated compliance teams, advanced technology infrastructure, and appropriate budget allocation for each process. Maintaining this distinction ensures regulatory compliance and minimizes enforcement actions.

Immediate risk assessment implementation is crucial. Delays create compliance vulnerabilities and potential penalties.

Expert Guidance for a Comprehensive AML Program

Oyster’s comprehensive risk assessment approach can help a firm ensure that all AML risks are identified and most importantly that the firm has the appropriate controls to mitigate the perceived risks.  Oysters independent audit personnel have extensive experience in reviewing an AML program against the material aspects of the BSA to determine any potential deficiencies in a firm’s process.

Strengthen Your AML Program with Oyster Solutions

Oyster Solutions’ governance, risk and compliance platform streamlines AML compliance by centralizing risk assessments, audit documentation, and ongoing monitoring in one intuitive system. The software enables firms to identify, score, and track AML risks, assign ownership for remediation, and maintain real-time visibility into compliance activities. With built-in workflows, automated alerts, and robust reporting tools, Oyster Solutions helps firms demonstrate program effectiveness, improve examiner readiness, and reduce the risk of regulatory violations.