A Practical Guide on AML Risk Assessment and Monitoring Program in 2025

As global regulatory expectations surrounding anti-money laundering (AML) and combating the financing of terrorism (CFT) become increasingly stringent, financial institutions face growing pressure to elevate their internal governance and compliance structures. Regulators such as the European Union, CySEC, and other supervisory authorities are continuously updating legislative frameworks to address emerging risks posed by sophisticated financial crime techniques. In this evolving environment, organizations are expected not only to comply with baseline legal requirements but to proactively enhance their ability to detect, prevent, and report activities related to money laundering (ML) and terrorist financing (TF).

The modern AML framework must therefore be dynamic, risk-based, and deeply embedded within an institution's operational and strategic processes. It is no longer sufficient to view AML as a box-ticking exercise; rather, it has become a critical component of enterprise-wide risk management. Institutions must demonstrate that they have the appropriate systems, controls, and cultural commitment to mitigate both current and emerging risks.

With this blog post, Christina Andreou, an instructor at the institute, explains the critical components of an effective AML monitoring program, focusing on six important AML aspects: Money Laundering and Terrorist Financing, AML risk assessment, AML function, AML Monitoring, AML Inspection and discussing the good and bad practices based on CySEC Circular C656. 

Towards the end of this blog post, you will find a summary of these six important AML aspects. This blog is designed to equip professionals with the practical knowledge of building a resilient and independent AML program with clear responsibilities, adequate resources, and a firm-wide mandate for oversight and accountability.   

Money laundering involves the concealment of the origins of illegally obtained funds, typically executed through three stages: placement, layering, and integration. Placement introduces illicit funds into the financial system, layering obscures the source through complex transactions, and integration reintroduces the funds into the economy appearing legitimate. In contrast, terrorist financing often involves the use of both lawful and unlawful sources to fund illicit acts, with a focus not on profit but on ideology. 

Despite differing motivations, both ML and TF share similarities in methods—such as structuring, wire transfers, and use of financial instruments—and typically occur in jurisdictions with weak AML/CFT enforcement. Regulatory bodies like the Cyprus Securities and Exchange Commission (CySEC) provide oversight by issuing directives, monitoring compliance, and using risk-based supervision approaches.  

The AML risk assessment is the cornerstone of an institution’s ability to allocate resources efficiently and monitor ML/TF risks effectively. This evaluation encompasses several dimensions, including customer profiles, geographic risks, delivery channels, and the complexity or transparency of products and services offered. 

To ensure effectiveness, the AML risk assessment must be conducted regularly and consider both internal audits and evolving regulatory developments. Priority levels—low, medium, or high—are assigned based on risk exposure, influencing the frequency and intensity of monitoring activities. High-risk areas demand ongoing surveillance and adaptive controls. 

A robust AML risk assessment should also feed directly into a broader Business Risk Assessment (BRA), providing a comprehensive view of potential threats to operations, including regulatory, financial, and reputational risks. 

The effectiveness of any AML strategy lies in the strength of the AML function itself. Divided across three levels of control, AML responsibilities include business units (first line), the AML function (second line), and internal audit (third line). The AML function must remain independent, permanent, and well-resourced—both in human and IT terms. 

Key responsibilities include: 

• Developing and enforcing AML policies and procedures 
• Conducting firm-wide AML risk assessments 
• Ensuring compliance with national and EU AML laws 
• Providing regular staff training and regulatory reporting 
• Monitoring internal controls and responding to risks and incidents 

Leadership roles such as the AML Compliance Officer (AMLCO) and AML Director must be clearly defined, CySEC-certified, and possess in-depth knowledge of both regulation and business operations. Additionally, firms must designate an Alternate AMLCO to ensure continuity during absences. 

Driving Effective AML Monitoring Programs 
An effective AML monitoring program must reflect the firm’s risk profile and consider changes such as mergers, IT upgrades, or organizational restructuring. It must extend to remedial actions taken in response to AML-related breaches, ensuring the firm remains compliant under scrutiny. 

A risk-based approach is central, enabling tailored monitoring tools, appropriate review scopes, and the efficient deployment of resources. Monitoring activities must also be collaborative, engaging various departments to foster a unified approach to financial crime prevention. 

Reviewing the AML Inspection Areas 
The AML inspection framework includes core areas such as corporate governance, client onboarding, customer verification, KYC documentation, and transaction monitoring. Inspectors assess how well the firm identifies, documents, and manages client risk, especially for high-risk clients or complex structures. Particular attention is given to suspicious transaction reporting, the use of third-party service providers, compliance with international sanctions, and handling of cash deposits exceeding regulatory thresholds. Firms are encouraged to adopt a proactive, well-documented approach and ensure that internal processes align with the AML risk profile and CySEC expectations. 

Good and Bad Practices based on CySEC Circular C656 
The CySEC Circular C656 focuses on key observations from CySEC’s inspections conducted between 2022 and 2023, summarizing both good practices and common deficiencies among regulated entities. Good practices identified include using open-source checks for high-risk clients and PEPs, involving senior management in client approvals, maintaining detailed customer files with risk assessments, and keeping AML policies updated in line with regulatory developments. Enhanced monitoring of newly onboarded clients and strong documentation processes also reflect a proactive approach to AML compliance. These practices demonstrate a firm’s commitment to effectively identifying and mitigating money laundering and terrorist financing risks. 

On the other hand, CySEC highlighted several weaknesses in areas such as generic AML manuals, incomplete customer profiles, improper application of Enhanced Due Diligence (EDD), and poor transaction monitoring. Many firms failed to assess risks from adverse media or UN/EU sanctions exposure and neglected to justify large transactions or loan sources adequately. Weaknesses were also found in suspicious activity reporting and record keeping, with some firms unable to produce key AML documents during inspections. CySEC expects all regulated entities to thoroughly review the findings of Circular C656, enhance their AML frameworks accordingly, and ensure robust, risk-based internal controls to avoid administrative sanctions.