Adverse media – or negative news – screening is widely regarded as a critical component of today’s financial crime risk management process. Yet financial institutions struggle to operate adverse media screening efficiently or they simply haven’t yet found the means to – citing challenges such as cost, resource and high false positive rates. Below, we outline five best practices for achieving smarter, more efficient adverse media screening.
Globally jurisdictions have rules that mandate customers and business partners are routinely screened against sanctions and PEP (politically exposed persons) lists to reduce the risk of financial crime. But this level of screening only reveals very specific aspects of the risk that a potential customer or counterparty may present – and it only identifies a limited set of individuals. Nor does PEP and sanctions screening identify real business risk for an institution. On the other hand, identifying people or organizations associated with money laundering, fraud or cybercrime could protect an institution from real loss.
Although the use of adverse media is in line with guidance from regulators and advisory bodies, there is an increasing focus on its application for due diligence. We define the use of adverse media as: “Leveraging identifiable material and relevant public information to provide insight and context into the background and history of the prospecting customer or partner, for the purpose of assessing potential risk and compliance exposure.” The short description could be: “bad people are often in the news before they’re on a list.”
However we describe adverse media, there is value for financial institutions in adding it to their armory of due diligence tools. It helps compliance teams cast their net wider, picking up potentially risky counterparties that basic KYC and AML screening could otherwise miss. It aligns the organization with the direction of travel of policy-making bodies and regulators such as FATF and the FCA, which is towards more in-depth, risk-based screening. It improves the quality of risk decisions. And it often provides early warning of potential future risk.
The Financial Action Task Force (FATF) includes adverse media screening in its anti-money laundering guidance, as part of its recommendation that organizations implement a risk-based approach to compliance. Regionally, guidance in the EU, UK, US and APAC reflect FATF and feature adverse media screening in compliance guidance.
Despite its many benefits, adverse media screening can be challenging to implement. Three key questions illustrate why:
1. Search smarter - How and where you search for adverse media can have a major impact on how effective and efficient the process is. The more data points held, the more accurate results are likely to be. And while accuracy is important, technology can help with matching where data is missing, for example identifying where individuals or companies have aliases.
As for the data source itself, remember the pitfalls of relying on unstructured internet search. It may be just about adequate for the very occasional screen carried out by a highly skilled researcher, but for higher volumes and a better guarantee of accuracy, a specialist adverse media database and screening engine is a better solution. Attributes to look out for in an adverse media screening solution include:
2. Match your activity to the risk - Due diligence is not a one-off exercise. The risk-based approach promoted by regulators and policy-making bodies means ensuring that screening against adverse media should be a continuing process. So screening at account opening may need to be followed up by re-screening, with a frequency determined by a specific customer’s risk level (see point 3 below). This could be set, for example, by a combination of the nature of their business or the country/region where they operate. Entities flagged as potential risks at initial screening may also deserve more regular re-screening.
3. Categorize risks - The risk-based approach to screening depends on knowing the risk profile of every customer and organization with whom you do business. It starts with deciding which specific risks (out of a potentially large list of offenses and financial crimes) are material to your business. This approach has significant advantages: for example, counterparties that are beneath your risk thresholds can be onboarded automatically, speeding up customer acquisition. At the other end of the scale, higher-risk individuals can be prioritized for further investigation, avoiding potential future problems while still not ruling out a potential new customer or partner.
It’s not practical to achieve this categorization manually, so look for a system with the following attributes:
4. Minimize false positives - Compliance teams waste significant amounts of time, effort and cost sifting genuine alerts from false positives. Even the best databases with the most accurate filters can still return an overwhelming volume of matches. This is where Artificial intelligence (AI) can help. Good AI solutions work through false positives much faster than humans and for much less cost. However, the models must be trained on substantial data sets and also stand up to regulatory scrutiny. The key is to look for vendors who understand what regulators are looking for and can clearly explain how their AI works.
5. Consolidate screening across the organization - It’s not unusual for financial institutions to have evolved to use a range of different adverse media solutions and vendors, in internal silos. This misalignment results in increased costs and means managers lose oversight of the process. Bringing the screening approach together has the potential to improve efficiency and cost performance. It can also potentially reduce risk by creating minimum standards for risk filters and screening timing and frequency.
Adverse media is essential to risk-based customer screening. But any financial institution seeking to either implement adverse media screening for the first time or upgrade their capability should be aware of the many pitfalls as well as the benefits. At the heart of all effective adverse media screening programs are high-quality data and technology that can provide the levels of automation and matching necessary. This way, adverse media screening can offer enhanced risk protection without increasing the burden on busy compliance departments.
Moody’s Analytics Know Your Customer (KYC) is transforming risk and compliance, creating a world where risk is understood so decisions can be made with confidence. Uncover hidden risk stats relevant to your operation with our adverse media database, which monitors from the earliest indication of risk, from accusation through conviction.
Harnessing our innovative technology and industry expertise, Moody’s Analytics automates accurate screening and swift onboarding of customers and third parties. We continue our support throughout the customer lifecycle by enabling the perpetual monitoring of counterparty risk across global business networks in near real-time. Our industry practice group stays up to date with the changing regulatory environment to ensure that our solutions can adapt while also keeping our clients updated so that they can proactively prepare for changes.
Moody’s Analytics KYC is helping customers automate onboarding journeys in 197 countries, across 211 jurisdictions: completing 800M+ new customer and third-party checks each day on average in 2022, including screening against our database of 17M+ risk profiles, 446M+ entities, and 34K+ sanctioned entities.