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The Financial Action Task Force (FATF) describes money laundering as the processing of criminal proceeds to disguise their illegal origin.[38] Terrorist financing refers to the financing of terrorist acts as well as of terrorists and their organisations[39] with funds coming from both legitimate and illegitimate sources.[40] A general global guideline regarding the management of money-laundering and terrorist financing risk is the BCBS’s recently updated “Sound management of risks related to money laundering and financing of terrorism.”[41] The EBA also published guidelines on money laundering and terrorism financing risk factors.[42] In Asia-Pacific, the APRA, refers to the money-laundering and terrorism financing risk as one “that a reporting entity may reasonably face that the provision by the reporting entity of designated services might (whether inadvertently or otherwise) involve or facilitate money laundering or the financing of terrorism.”[43]

Based on these regulatory descriptions, we define money-laundering/terrorist financing risk as the exposure to legal penalties and reputational loss faced by financial institutions failing to prevent money laundering or terrorist financing.