What is the correct risk assessment equation used in AML/CFT compliance frameworks, including for cryptoasset...

In risk-based AML/CFT programs — including those applied to Virtual Asset Service Providers (VASPs) — risk assessment determines the remaining exposure after applying mitigating measures.

Inherent Risk:The natural level of risk before applying any controls, based on factors like customer profile, transaction patterns, and jurisdiction.

Control Effectiveness:The degree to which implemented controls (e.g., CDD, EDD, sanctions screening, blockchain analytics) reduce risk.

Residual Risk:The risk that remains after controls are applied and is the level an organization must either accept, reduce further, or avoid.

The standard formula is:

Inherent Risk – Control Effectiveness = Residual Risk

This equation is emphasized in FATF’s risk-based approach guidance and reinforced in DIFC (DFSA) and ADGM (FSRA) AML rules to ensure ongoing monitoring and governance oversight of remaining risks.