Financial firms should screen for negative news about their prospective clients as part of a comprehensive due diligence review
The process of screening for negative news stories about customers to assess the financial crime risk they pose should be effective and efficient, risk-based, and tailored to legal and regulatory requirements in the jurisdiction in which an institution operates, a bank-industry anti-money laundering (AML) group in its latest guidance report.
The paper from the Wolfsberg Group of 13 major international banks comes as many financial institutions are struggling with how to address customers in Russia who have not yet been sanctioned but might be targeted by the US government and its allies due to their ties to Russian government.
In its paper, presented as a series of Frequently Asked Questions (FAQs), the Wolfsberg Group states: “While there remain some limitations and challenges pertaining to broad media searches, negative news screening can be a valuable mechanism which enables financial institutions to have a better understanding of who they are doing business with and the risks to which a financial institution is exposed.” The Wolfsberg Group works to develop frameworks and guidance for financial institutions to manage financial crime risk.
Negative news or “adverse media” is a cornerstone of customer due diligence. It may seem straightforward in concept, but when AML professionals try to put it into practice, “it can bury you with mountains of irrelevant hits that need to be investigated,” said one expert familiar with the Wolfberg paper, adding that this makes proper design of the process vital.
The paper was not specifically designed to tie in with an effort by the US Treasury Department and the global AML-standard-setting Financial Action Task Force (FATF) to increase the effectiveness of AML programs, the source explained. However, negative news screening can be an important component. “If done incorrectly, it can be a massively inefficient process,” the source said.
The Wolfsberg paper says, “there is no single, universally agreed approach to negative news screening, therefore the Wolfsberg Group has developed this guidance to assist financial institutions in establishing their negative news screening framework in support of financial crime risk management.”
Negative news screening allows financial institutions to apply a range of public information, data, and analysis to help determine the risk profile of a customer. This can help the institution understand the financial crime and reputational risks posed by a business relationship so that those customers and the relationships can be managed.
The value of conducting negative news screening “is correlated to the availability of information and the credibility of the media source in the public domain,” the paper states, noting that some customer types such as high-net-worth individuals, politically exposed persons, big corporations, and financial institutions are more likely to have a high public profile, and therefore, would be expected to be subjected to a higher degree of media scrutiny. “In these situations, the performance of broad-based… negative news screening may be appropriate on a risk-sensitive basis,” the paper states.
Conversely, an ordinary retail customer will likely have a lower public profile and therefore much less media scrutiny, the paper adds. “In this instance, more targeted searches of structured news and media sources might be more appropriate to ensure an effective use of resources. It may also be appropriate not to conduct negative news screening; a financial institution would not be expected to devote resources to negative news screening where the added value is negligible or disproportionate to its financial crime risks.”
Financial institutions should consider assessing the sources monitored in negative news screening, in part to avoid “fake news” or “disinformation,” the paper notes, adding that when an institution uses an external party or vendor to supply a pipeline of media sources or content, “it is recommended that the financial institution understands the evaluation of reliability performed by the vendor and the controls they have in place to mitigate the risk of unreliable sources influencing the screening process.”
The paper goes on to say that “international news agencies and national newspapers which report on a broad spectrum of global and national events usually provide accurate and higher quality reporting” and that the “credibility of the content is in general higher when subject to editorial oversight.”
Ensuring screening solution is suitable
Financial institutions might want to consider a number of factors when evaluating a negative-news screening solution to ensure that it is suitable, or “fit-for-purpose”, the paper states. These include:
- Coverage — robustness of the database content and scope of monitored media sources (Financial institutions should have sufficient media coverage in the markets in which they operate or where their customer base is located.)
- Data — completeness, integrity, and timeliness of negative news information (Consideration should be given to negative news screening accuracy and completeness, and levels of alert duplication if the same adverse data is found in multiple data sources.)
- Matching — effectiveness of name matching, and false positive/alerts hit rate
- Archive — accessibility of media articles which are archived or no longer available in open sources
- Translation — capability to provide news or events translated into the language of financial institutions’ operations
- Scalability — ability to define search parameters, search depth, and result filtering
- Reporting — availability of relevant dashboards and performance metrics
- Traceability — the recording and capability to review all internal screening events, configurations, and other logic applied to generate a match
- Data sharing — consideration of local data-sharing requirements when utilizing external or shared solutions, especially where external tools and teams are used to perform screening or adjudication on financial institutions’ behalf
The implementation of negative news screening is part of the overall set of financial crime compliance controls, and the risk appetite of the financial institution is at the center of the approach taken, the paper states.
“Given the potential scale of negative news screening, periodic effectiveness and efficiency testing will be essential to refining the approach taken by financial institutions to ensure negative news screening is optimized and adds value.”