Biases in risk assessments under EU anti-money laundering law – evidence of the better-than-average effect from Germany
Journal of Money Laundering Control
ISSN: 1368-5201
Article publication date: 6 May 2022
Issue publication date: 30 May 2023
Abstract
Purpose
Anti-money laundering (AML) obligations follow a risk-based approach, making their extent subject to the degree of AML risk. Money Laundering Reporting Officers (MLROs) must constantly assess risks, for example, by conducting annual risk assessments of the company. The purpose of this paper is to analyse whether MLROs’ risk assessments are biased in form of a better-than-average (BTA) effect, meaning whether they favourably assess their own company’s risk compared to that of the average competitor. Additionally, MLROs’ general risk assessment capabilities are researched.
Design/methodology/approach
A survey of MLROs of German companies was conducted (n = 228). It tests for a BTA effect in participants’ risk assessments of their own company as well as for errors in risk assessments of other industries.
Findings
MLROs’ risk assessments are biased by a BTA effect across all industries. They view their own company’s risk to be below that of the average competitor. Additionally, MLROs are not able to correctly assess industries’ AML risks compared to the national risk assessment. Risks were especially underestimated for high-risk industries. Biases were partially found to be higher among MLROs from the non-financial sector.
Practical implications
Risk-based AML measures are likely to be at least partially ineffective, calling the risk-based approach into question. Regular trainings of MLROs need to include awareness for biases in risk assessments. A more stringent and effective supervision, especially in the non-financial sector, is called for.
Originality/value
To the best of the author’s knowledge, this paper is the first to show that a BTA effect exists among MLROs.
Keywords
Acknowledgements
The author would like to thank all Money Laundering Reporting Officers who participated in the study and completed the relevant questionnaire, as well as all pre-test interviewees. The author is also grateful for the valuable comments received from other active compliance officers, as well as from various researchers at the TUM School of Management, in particular Sascha Vogel.
Data availability statement: The research instrument is available from the author upon reasonable request.
Citation
Haffke, L. (2023), "Biases in risk assessments under EU anti-money laundering law – evidence of the better-than-average effect from Germany", Journal of Money Laundering Control, Vol. 26 No. 4, pp. 751-766. https://doi.org/10.1108/JMLC-03-2022-0045
Publisher
:Emerald Publishing Limited
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