The Fifth Money Laundering Directive (5MLD), transposed in the UK as the Money Laundering and Terrorist Financing (Amendment) Regulations 2019, was implemented on 10th January 2020. The directive was designed by the European Union to protect the financial system from increasingly sophisticated methods of money laundering and terrorist financing.
Although previous iterations of the directive had included adverse media screening, 5MLD has extended the list of sectors that fall within the scope of the updated regulations to include, for example, tax advisers, letting agents and crypto-asset exchanges.
These new ‘obliged entities’ are now required to implement financial crime prevention processes, including adverse media screening, in line with the practices carried out by banks and other regulated sectors.
Adverse media, also known as negative news or derogatory media, is information published by news outlets that is used by banks and other organisations to assess the risks associated with a customer or transaction.
Alongside other checks, such as sanctions and politically exposed person (PEP) screening, identifying the adverse media associated with a client can help to inform the organisation’s decision as to whether engaging in a business relationship poses a potential risk.
Within this context, adverse media data concentrates on specific themes that relate to financial crime; it could include, for example, a local news article that identifies someone suspected of bribery. Other categories that can cause concern to Money Laundering Reporting Officers (MLROs) include human trafficking, drug smuggling, weapons of mass destruction, fraud, and tax evasion.
The process of checking and screening against this data involves searching for negative news about a person or business. This usually happens as part of the Know Your Customer (KYC) and Anti-Money Laundering (AML) process carried out when onboarding a new customer, or conducting periodic reviews of the customer’s account.
Negative news, coupled with suspicious transactions, can increase a client’s risk-rating, cause Suspicious Activity Reports (SAR) to be filed against them, or even put an end to the business engagement. Even without the suspicious activity, however, this data alone is powerful enough to result in further action against a client or counterparty.
Additionally, derogatory news does not always have to pertain specifically to a financial crime-related conviction; a mere accusation can cause substantial reputational risk, which a firm may wish to avoid.
Overall, using adverse media data as part of the KYC process can significantly improve risk mitigation and reduce the chance of receiving fines from regulators. What’s more, when this data is optimised and streamlined as part of an automated screening process, it can yield immediate opportunities to increase efficiency.
Though the financial services sector has been required to include adverse media screening within its AML and KYC procedures for some time, it is yet to adopt a standardised approach across the board. Many financial institutions and banks dedicate limited resources to this area. One reason for this is the sheer volume of information available, which can be time consuming and difficult to analyse.
Traditionally, adverse media screening has been completed manually, often undertaken via a Google search. However, Google searches provide no audit trail, so proving at what point a search was completed and who conducted it is a challenge, not to mention the labour-intensive nature of this approach.
By making a shift towards automated screening and using a dedicated media analysis tool, searches not only become more accurate, but they can be focused on financial crime related news from reputable sites, and ultimately reduce the operational burden on firms.
Working out who a story relates to, the impact the story could have on the business, and whether the source can be trusted, needs to be conducted automatically using big data analytics, which in turn requires well-structured data.
For all regulated entities, adverse media screening should occur throughout the AML/KYC customer lifecycle. In order to perform efficient and effective Enhanced Due Diligence on customers, firms must look to automation, using structured media data as a means of reputational protection.
Lessons can be learnt from the traditional, largely manual, methods of screening, which have caused a fragmented approach within financial institutions, with teams often working in silos. This has led to the duplication of effort as well as increasing the cost of screening.
As 5MLD widens its scope of ‘obliged entities,’ organisations within the expanded range of relevant industries must define their adverse media screening strategy, set standards, and create a cohesive and consistent business approach. This should include designing and implementing adverse media policies and procedures to promote coordination and efficacy across all business areas.
To learn more about adverse media screening, download our Negative News Impact: Five Best Practices for Adverse Media Screening whitepaper, or contact us to discuss how Accuity can help your organisation.