The risk-based approach to AML: representation, paradox, and the 3rd directive Dionysios S. Demetis and Ian O. Angell Information Systems and Innovation Group, Department of Management, London School of Economics and Political Science, London, UK Abstract Purpose – This paper seeks to deconstruct the proposed risk-based approach to anti-money laundering (AML) and to relate it to the text of the European Union’s 3rd Directive. The paper also aims to discuss a variety of risk-related aspects and how they have come to be constructed on the sociological perspective of risk and subsequently to examine the relation of risk elements to AML. Design/methodology/approach – The theoretical approach of the paper is based on the tradition of second-order cybernetics and on many of the theoretical concepts discussed by Niklas Luhmann, as well as his work on the sociology of risk. Findings – The implications for the risk-based approach on AML are discussed on the basis of how risk can be represented and categorized, and the paradoxes behind various such risk-classifications are analysed, thus offering a critique on the oversimplification with which risk has been appropriated within AML. Practical implications – The practical implications of this paper relate to how risk should be considered within the domain of AML and how financial institutions and financial intelligence units should mostly focus on re-constructing the aspects surrounding risk-communication. Originality/value – The originality of this paper lies in its unique treatment of risk within the context of AML, while clearly exposing the unavoidable observational paradoxes that the concept of risk induces, as well as examining the consequences on the risk-based approach for dealing with AML. Keywords Money laundering, Risk assessment, Risk intelligence Paper type Conceptual paper Introduction In this paper, we shall outline some subtleties surrounding the risk-based approach to anti-money laundering (AML). We object to the unstated but none-the-less intended assumption that a risk-based approach somehow reduces hazard. Our arguments follow on from previous work where we described AML through the lens of systems theory (Angell and Demetis, 2005), and thereby analysed the systemic effects of AML-related technologies that, when adopted by financial institutions, financial intelligence units (FIUs), and other stakeholders, precipitate a variety of unintended consequences (Demetis and Angell, 2006). Here, we present our deconstruction of the risk-based approach, and relate it to the text of the European Union’s 3rd AML Directive (EU, 2005). However, before considering risk in the context of AML, it is important first to reflect on both the nature of risk itself, and the way it is observed, for there is a widespread misunderstanding of the way risk is perceived, represented and handled; we choose not to refer to managing or controlling risk because these are inappropriate oversimplifications. The current issue and full text archive of this journal is available at www.emeraldinsight.com/1368-5201.htm JMLC 10,4 412 Journal of Money Laundering Control Vol. 10 No. 4, 2007 pp. 412-428 q Emerald Group Publishing Limited 1368-5201 DOI 10.1108/13685200710830907