The United Nations Office on Drugs and Crime estimates that money laundering adds up to anywhere between 2% and 5% of global gross domestic product (GDP) every year. With global GDP topping $87 trillion in 2019 before reportedly falling to approximately $84.5 trillion in 2020, that means between $1.7 trillion and $4.4 trillion was potentially laundered in each of the last two years.
Given such staggering numbers, it’s no wonder federal financial regulators place so much importance on the anti-money laundering (AML) programs at financial institutions. With the AML fight getting more complicated every year as criminals and terrorists adjust and acclimate to prevention efforts, adverse media screening has become a powerful weapon in the money laundering war.
Unfortunately, adverse media screening remains poorly understood and inadequately implemented at many financial institutions. It’s time to change that.
What Is Adverse Media Screening?
Adverse media screening is the process of scouring various news and information sources for any type of negative knowledge or activity related to your customers. It can reveal a number of things that might suggest an elevated risk of money laundering associated with them, including the following:
- Press reports or posts that cast doubt on a customer’s reputation, legitimacy or credibility
- Information that underscores the complexity of a customer’s life or business, including connections to other high-risk or reputationally suspect individuals or businesses
- News of a customer’s financial troubles that may make them desperate and possibly susceptible to corruption or fraud
- Indications of past or present corruption that might be repeated
- Law enforcement allegations or indictments of criminal activity, including but not limited to money laundering, terrorist financing, drug trafficking, cybercrime and fraud
- Actual criminal convictions, especially those related to financial crime
Local, national and international sources can be screened, including traditional media outlets such as newspapers, magazines, television and radio, as well as contemporary online resources such as websites, blogs and social media. In addition, financial institutions can also look at law enforcement, government agency and business databases for adverse information about their customers.
Adverse Media Screening Requirements Confuse Financial Institutions
The Financial Action Task Force (FATF), the independent inter-governmental body that recommends AML and counterterrorism financing (CTF) standards to protect the global financial system, has been a consistent and vocal proponent of a risk-based approach to AML and CTF. This includes the use of enhanced due diligence tactics such as adverse media screening.
Here in the United States, the Financial Crimes Enforcement Network (FinCEN) issued its Customer Due Diligence (CDD) Final Rule in 2018, which amended Bank Secrecy Act (BSA) regulations, requiring financial institutions to “establish and maintain written policies and procedures that are reasonably designed to” accomplish the following:
- Identify and verify customer identities
- Identify and verify the identity of beneficial owners of legal entity customers
- Understand the nature and purpose of customer relationships in order to develop a customer risk profile
- Regularly monitor customers and their accounts to identify and report suspicious activity and also maintain and update customer information on a risk basis
Adverse media screening is obviously one tactic that can help financial institutions fulfill their CDD obligations. However, as noted in recent FinCEN Guidance, the CDD Rule doesn’t “categorically” require financial institutions to conduct it nor does it specify particular adverse media screening requirements. Instead, it says that a “covered financial institution might assess, on the basis of risk, that a customer presents a higher risk profile, and accordingly, collect more information to better understand the customer relationship.”
This lack of specificity about adverse media screening in FinCEN’s rule should not be misconstrued as a green light to forego it. In fact, a recent enforcement action is proof that regulatory examiners expect financial institutions to appropriately conduct and act on adverse media screening. The FinCEN press release announcing the $390 million civil money penalty (CMP) said the institution’s “egregious failures allowed known criminals to use and abuse the nation’s financial system unchecked, fostering criminal activity and allowing it to continue and flourish at the expense of victims and other citizens.”
The actual Assessment of Civil Money Penalty elaborated on this point, noting that an institution should combine all of its knowledge about customers to adequately determine their money laundering risk. According to FinCEN, the bank in question apparently “did focus on identifying if the customer had negative news on them,” but failed to adequately use it “to understand the nature and legitimacy of their customers’ activities and patterns therein.”
Constant Flow of Information Defies Manual Screening Efforts
In today’s complicated world, financial regulators are on high alert for money laundering risks. The first mistake financial institutions make is not conducting adverse media screening at all. The second and no less alarming error is attempting to manually carry out the screening. Unfortunately, it’s not as simple as a one-time Google search.
Instead, media screening should be conducted at onboarding and routinely repeated and monitored periodically on a risk basis to better understand customers and the money laundering risks they pose. The effort required to adequately sift through this vast amount of information is not humanly possible, especially when you consider these factors:
- Public domain sources: Even if you limited your search to the publicly available articles in major newspapers, they post stories 24/7. Furthermore, you could miss important information by not screening other credible or valid open sources, whose local, national and international ranks grow with each passing year.
- Private and closed sources: Subscriptions are often required for newspaper and magazine article access. In addition, some law enforcement, government and business databases that can house potentially relevant information about customers are unavailable to the general public without permission or not available at all.
- Language barriers: International stories or posts published in a different language may not be readily translated into English, rendering them useless to employees charged with adverse media screening tasks.
- Information overload: The sheer volume of articles, blogs, social media posts, news reports and other information published every day makes it physically impossible for any person to follow it all, much less have the time or capability to decipher what’s relevant and what’s not.
- Customer connections: It’s not just negative information about your customers. Other persons or entities connected to them can also be relevant. For example, the global parent of a bank’s commercial customer could have foreign subsidiaries that represent an elevated risk for money laundering, which needs to be monitored, in part through adverse media screening.
- Information leads: Depending on their lifestyle or business type, any number of news stories or posts could result from screening a customer for negative news. All hits must then be moved to the investigation stage.
- Investigations: As employees review hits, they need to determine which stories or posts can be dismissed as irrelevant or immaterial from those that need to be escalated for further examination.
- Recordkeeping: Every lead, whether dismissed or escalated, should be documented in an audit trail for further reference in the customer file and to document your customer due diligence efforts for regulatory examiners.
Manual Efforts Give Way to Adverse Media Screening Software
Given the high cost of manual attempts to conduct adverse media screening and the very real risk that stories about their customers can cause, many BSA/AML compliance officers are turning to adverse media screening software to tackle this critical task in order to pass examination scrutiny and avoid unwanted and expensive CMPs.
In fact, the Dow Jones Adverse Media Screening Best Practices Guide counts such software as part of a structured approach to this aspect of your AML program, which includes the following elements:
- Performing a risk assessment to understand and define your risk appetite
- Determining when, on whom and how often you need to conduct adverse media screening
- Evaluating the usefulness, credibility and timing of sources and stories found
- Maintaining an audit trail of all screening for management reporting and regulatory documentation
- Implementing technology to streamline the screening process
- Creating an organizational culture of BSA/AML compliance
Among other things, adverse media screening software can automate the timing of screening based on a financial institution’s designated parameters, access and validate a larger number of credible sources, scan a massive trove of information and reduce the number of false positives potentially clogging up the investigation and escalation phase of your process.
Knowing Your Customer in the Digital Age
Thanks to the vast amount of information available online, today’s financial institutions have a much greater ability to know about a customer’s past and present activities and connections. Federal financial regulators expect you to take advantage of this fact to assess and determine the level of money laundering risk your customers pose, regardless of whether adverse media screening is specifically required by a rule or the fact that adequately conducting it through manual means is physically impossible.
Dave Moggio serves as the director of product strategy for CSI.