Following Financial Action Task Force (FATF) guidance, most anti-money laundering (AML) and counter-financing of terrorism (CFT) regulations require financial institutions to take a risk-based approach to compliance. Predicated on a need to perform risk assessments on individual customers, the risk-based approach is applicable to every aspect of modern AML/CFT, including negative news screening (NNS).
On 11 May 2022, global banking association the Wolfsberg Group released an FAQ on negative news considerations. The FAQ includes a focus on risk-based negative news screening (also referred to as adverse media screening) as part of a wider AML/CFT solution, including how to manage the scope of a news search.
To help your business integrate risk-based negative news screening as part of your AML/CFT solution, we’re taking a closer look at the Wolfsberg Group’s insightful FAQ.
What is the Risk-Based Approach?
Risk-based AML/CFT is the process of assessing individual customers to determine the level of criminal risk that they present, and then deploying a compliance response proportional to that risk. Under the risk-based approach, higher risk customers may warrant more intensive AML/CFT measures and controls, while lower risk customers may warrant simpler measures.
The risk-based approach represents a way for organisations to balance regulatory obligations with budget and resources. Given the complexity and expense of AML/CFT compliance, financial institutions may direct time and money towards their higher risk customers rather than their lower risk customers.
Risk-Based Negative News Screening
In the context of financial compliance, negative news screening may be a measure that financial institutions deploy for a subset of their portfolio, including their higher risk customers. Customers with elevated public profiles, such as politically exposed persons (PEP), may be featured in news stories that reveal involvement in financial crime. Similarly, news stories may reveal that foreign customers have been designated on sanctions lists before that information is confirmed officially.
Negative news screening may also be applied to lower risk customers in a much broader manner. Financial institutions may run simple name searches, for example, for customers with less visible public profiles who do not justify the same level of compliance effort as their higher risk counterparts.
Determining the Scope of a Negative News Search
Financial institutions must use their customers’ risk profiles to determine the focus and scope of their negative news screening measures. Key risk factors that should inform the negative news screening process include:
- The services and products that the customer uses.
- The customer’s demographic profile.
- The customer’s geographic location or the locations with which they have business connections.
- The criminal risks associated with the financial institution’s industry segment.
- The details of the customer’s internal risk profile (as informed by the factors described above).
Certain internal and business factors will also play a part in shaping a risk-based negative news screening solution. Financial institutions should consider the following factors:
- How often previous customers or clients have been involved in criminal incidents.
- The legal and reputational consequences of doing business with customers involved in financial crime.
- The speed with which the financial institution could move to address exposure to compliance liability.
- The financial crime typologies, such as bribery or political corruption, that are typically revealed by effective negative news screening.
- The resources available to dedicate to adverse media screening.
Negative news stories do not necessarily all present the same level of compliance risk, and the substance of specific stories may affect customer profiles in different ways. With this in mind, financial institutions should seek to categorise news stories by risk, using groupings such as:
- Regulatory violations
- Drug trafficking
- Human trafficking
- Financial crime
Similarly, the source and format of the negative news story is also relevant to a financial institution’s risk appetite. When gauging the risk that individual stories present, it may be important to consider:
- Source credibility: An established news outlet may be considered to have more credibility than a personal blog or a webpage that is available for public editing.
- Governmental influence: Some news sources may be state affiliated or have political biases that affect the character of their stories.
- Customer relationship: The significance of negative news may ultimately be determined by the relationship that a financial institution has with its customer. With that in mind, the risk that negative news stories represent may be mitigated by privileged insights that a given financial institution has into a customer’s financial activity.