Effective CDD Through Adverse Media Screening

Understanding the requirements and options of Adverse Media screening is key to creating an effective CDD program

Greg Pinn

Greg Pinn

May 31st 2020
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Most financial compliance teams are aware of the need to perform adverse media screening (sometimes referred to as negative media screening or negative news screening) of some or all of their clients as this has been a key part of Anti-Money Laundering (AML), Countering the Financing of Terrorism (CFT), and Customer Due Diligence (CDD) processes for many years.  While this requirement is often assumed, many do not understand the different definitions and implementations of adverse media screening for client and customer due diligence.

What is Adverse Media Screening?

Adverse Media screening is the regulatory requirement to screen customers, suppliers, and other 3rd party relationships against available reputable news content to determine the level of risk this relationship will pose to the institution performing the screening.  Adverse media screening is required for both financial institutions and regulated non-financial institutions, including casinos, real estate agents, lawyers, trust companies, and dealers in precious metals and stones.

Adverse media screening can be conducted against two types of data: structured and unstructured.

Structured Adverse Media screening parallels sanctions, watchlist, and PEP screening.  Financial institutions rely on third-party data providers to identify and structure high-risk individuals and entities into profiles for screening against the institution’s client and 3rd party records.  The completeness and accuracy of these databases are dependent on the scale and competency of the data aggregator, the language capabilities of their researchers, and the scope of their source data.  These aggregators rely heavily on human researchers to identify relevant individuals and entities and properly structure the data found in media sources.

Unstructured Adverse Media screening provides access to a large pool of news media content filtered to relevant topics.  This data can be searched through publicly available tools using user-supplied keywords, through specialized keyword-based and rule-based systems, or through advanced AI-driven systems that can closely mirror the structure of Structured Adverse Media with much greater scope.

Why is Adverse Media Screening Required?

Adverse Media is a core component of all Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD) screening processes.  As part of a Risk-Based Approach (RBA), financial institutions must determine the necessary amount of screening to perform on each customer based on the individualized risk of the customer, account type, as well as type of transaction.  For lower-risk customers, such as low-value, domestic savings accounts with few transactions, a sanction and PEP screening may be sufficient.  For high-risk clients, including clients from high-risk jurisdictions, those conducting large transactions, and those conducting transactions without an obvious business purpose, additional screening is required.  

That additional screening requires financial institutions to conduct all reasonable research to understand the history and background of the individual or entity engaging in a financial relationship, regardless of whether that relationship is long-term (e.g. prior to account opening) or temporary, (e.g. single transaction).

Sanctions lists are insufficient to fulfill this requirement as they are limited to, at most, a few thousand records and include only the most dangerous, high-risk terrorists, drug traffickers, and other very high-risk individuals, entities, and countries.  Watchlist screening, while more comprehensive than sanctions screening, is also incomplete. These lists do not provide any information on millions of high-risk individuals and entities that may pose money laundering or terrorism risk.

What Adverse Media Screening is Required?

hile there may be an impulse to fully investigate all aspects of a potential client, that is simply not realistic.  Financial institutions must focus their AML efforts to mitigate reputational and regulatory risk.  To that end, the Financial Action Task Force (FATF) has set guidelines for predicate offenses that have been implemented by countries globally, including the US, UK, and European Union:

Arms TraffickingHuman Trafficking / Migrant Smuggling
ArsonInsider Trading & Market Manipulation
Concealment of AssetsKidnapping, Illegal Restraint, and Hostage-taking
Corruption & BriberyOrganized Crime / Racketeering
Counterfeiting CurrencyPiracy
Counterfeiting ProductsRobbery or Theft
CybercrimeSexual Exploitation
Drug TraffickingSmuggling
Environmental CrimeTax Crimes
ExtortionTerrorism / Terrorist Financing
ForgeryTrafficking in Stolen Goods
FraudViolent Crime (Murder & Grevious Bodily Injury)

As the amount of news content continues to grow, structured media providers are going to have a more and more difficult time keeping up with the fast pace of news and ensuring complete coverage for global risks.  Traditional keyword-based and rules-based adverse media solutions generate too many false positives and miss key risks that cannot be identified through keywords alone.  Financial institutions and regulated businesses should investigate and implement new machine learning and NLP-based technologies that extract key information from relevant news articles and reduce noise to expedite their research while ensuring all potential risks are identified.

To learn more about how Merlon is solving these adverse media challenges, go to https://merlon.ai/solution.

We built Merlon to allow you to instantly use the power of AI to fight financial crime.