152. A zero-tolerance approach that does not tolerate imperfections, particularly in areas identified to pose lower risks, is counterproductive to an effective AML/CFT system and for risk-based supervision. This is valid both at the supervisory agency and in terms of an entity's approach to meeting its requirements. In certain cases, it may be difficult to develop institutional support for taking a risk-based approach due to fears of missing compliance failures in areas deemed as lower risk. It also requires deep knowledge of sectors and providers, critical thinking and subjective judgment by supervisors. As set out in section 3.7, there may be valid reasons for supervisors to take remedial or other action across the risk spectrum if, for example, the failure is due to repeated, knowing or wilful non-compliance with AML/CFT requirements. At the entity level, a zero tolerance approach could lead to indiscriminate cutting loose of entire classes of customer, without taking into account, seriously and comprehensively, their level of risk and risk mitigation measures for individual customers within a particular sector.

153. Strategies to address this challenge:

• Especially in the introductory stages of the implementation of a risk-based approach to AML/CFT, supervisors should explain the approach to their regulatory population and clearly explain and provide guidance on how it should be applied. In justifying their approach internally, supervisors should seek high-level support for their supervisory strategies by explaining its rationale and be able to demonstrate the benefits of this approach.