Long overlooked as important in risk management, negative news screening’s significance in combating financial crime is coming to the fore, as the Wolfsberg Group emphasizes in its FAQ for financial institutions.
The Wolfsberg Group is a global authority on standards for know your customer (KYC), anti-money laundering, and counter-terrorist financing in banking. Its recent FAQ on negative news screening gives profile and importance to an area that many financial institutions have underestimated as a risk indicator. Adverse media screening has often been a low priority in customer due diligence - associated only with reputational risk. Wolfsberg explains why negative news screening is more significant than that, and why it should form an integral part of risk profiling.
Moody’s Analytics KYC agrees negative news screening should be intrinsic to a risk management framework – it contributes to risk profiles, and companies should check for adverse media as they do for other risk factors. Checks for sanctions and politically exposed persons (PEPs) will only uncover some risk sources in a business network. Negative news, garnered from independently verified sources, provides a different indicator of risks associated with individuals and entities.
There is no universally agreed definition of negative news as there is for a sanctioned entity. If you do not have a well-defined concept of negative news, the volume of data generated by searches is impossible to process and gather meaningful information from.
Financial institutions need to gain actionable data from negative news screening. Moody’s Analytics KYC has a large and comprehensive risk database, which includes adverse media and negative news. We have established a risk code glossary that defines negative news for clients, with clear criteria for users to interrogate. We have long used robust data and automation to create comprehensive risk profiles for every individual or entity in a customers’ business network, and negative news screening forms part of this approach.
Identifying possible bad actors within any ownership and control structure is a significant component of customer due diligence. Negative news screening can reveal involvement in or association with crime that other checks may not catch. This information can trigger a financial institution to act, for example by offboarding a client, or it can trigger an investigation into suspicious activity.
The source of news is important – misleading and irrelevant information is easy to find, and false news can weaken screening. Criminals can hide or mask their profiles online. Search engines are not databases, and are subject to advertising and optimization that can deprioritize material relevant to a case.
A bank is unlikely to prioritize scrutiny of media sources among its skill set. Choosing the right partner for this process of gathering, filtering, and analysis is therefore crucial. Experts like those at Moody’s Analytics KYC can help a bank ensure data isn’t hidden, filter relevant information, and identify biased or unreliable sources.
The most important factors for screening are the risk category and the risk stage of the negative news event. Useful guides to risk events include the European Union’s sixth money laundering directive, which determined 22 predicate crimes, and guidance from the US Financial Action Task Force (FATF) that determined 21 predicate crimes. Offenses include money laundering, bribery and corruption, terrorist financing, organized crime, environmental crime, fraud, and sexual exploitation.
Severity and chronology – the stage of a risk event – affect an event’s materiality. Financial institutions may be interested in a person accused of drug smuggling, but they may be less concerned about someone found guilty of a minor motoring offense 20 years ago. The risk stage covers the entire legal and judicial process from allegation to outcome.
To identify a material event among noise, a financial institution needs to precisely define the risk categories and risk stages it is interested in. Doing so makes screening effective and monitoring easier, and can be supported by Moody’s solutions.
Financial institutions need analysts to look at actionable data, rather than guessing what to search for. Manual searches are time-consuming and may prove fruitless. Analysts would need to know exactly what they were searching for to derive a worthwhile outcome. Simply putting a name into a search engine and trawling through the results is unlikely to help.
Manual tasks can be automated through robotic process automation and an adverse media database, such as Moody’s Analytics GRID. Automation tools curate and filter information, and the database contains both recent and historical news material from trusted, independent sources.
Automated screening also ensures auditability. Adverse media searches using GRID are time-stamped to provide evidence to a regulator that due diligence has taken place. The screening configurations used for each search are also auditable.
A bank needs to understand how information gathered from negative news screening is relevant to its specific risk framework. Screening and due diligence are driven by the bank’s own attitude to risk, as well as its risk appetite, which becomes the basis for customer risk ratings, and how alerts are set and managed.
Financial institutions establish a risk profile by collecting static data such as addresses and ownership information. Then they refine that profile using supplementary data like negative news. This process enables the institution to refine its decisions using a complete set of data that forms an accurate picture of risk. The bank can then decide whether it has the appetite to take on that risk.
In the absence of quality assurance and a robust framework for customer due diligence, a financial institution wastes time and money, and opens itself to risk. Quality assurance in negative news screening ensures data integrity, which allows banks to make better risk-based decisions.
The outcome of customer due diligence determines whether a bank transacts with an individual or entity. A high-risk profile created without quality assurance could lead to a bank refusing to onboard a client or offboarding them. Financial institutions don’t want to exclude people unnecessarily or be accused of unconscious bias.
We assume people are innocent until proven guilty. Our screening presents quality data that reliably informs a risk profile, and fills in part of the picture that enables banks to make onboarding decisions and a plan for further investigation or monitoring.
Typically, a financial institution runs customer due diligence checks every one, two, or three years, depending on a customer’s risk profile. Moody’s Analytics supports perpetual KYC through workflow orchestration integrated with data checks, including negative news and adverse media screening.
Negative news screening can be integrated into a perpetual KYC approach. Adverse media related to an account influences an update in the risk profile of an individual or entity in real time. Banks don’t need to periodically refresh data if circumstances haven’t changed. A bank’s response to negative news can be quicker because screening takes place in real time.
Moody’s Analytics KYC has a large and comprehensive risk database, comprising information on adverse media and negative news, sanctions, watchlists, and PEPs.
Risk information is curated into detailed reports, organized by individual or entity, creating a comprehensive, structured view of any associated risks in one place.
The combination of data and categorizations allows you to filter information by risk type, stage, and age to garner the most relevant data. This results in precision, efficiency, and fewer false positives.
Please get in touch to talk about your approach to risk management, including screening for negative news – we would love to help.