Strengthening a risk-based approach to AML/CFT with adverse media in the EU

New planned AML regulations in the EU will reinforce the importance of a risk-based approach for banks. Automated, scalable adverse media solutions are an important component of this, enabling banks to conduct comprehensive customer risk assessments, taking into account a number of factors that may not be captured by transaction monitoring tools alone. 

What is a risk-based approach? 

In its Risk-Based Approach Guidance, the Financial Action Task Force (FATF) identifies adverse media searches, also known as negative news checks, as a part of Enhanced Due Diligence (EDD) practices relating to individual customer risk assessments. In a recent report, the European Banking Authority (EBA) outlined what the EU considers an appropriate risk-based approach in four steps. These are:

• The identification of ML/TF risk factors
• The assessment of those ML/TF risks
• The allocation of AML/CFT supervisory resources based on the outcomes of the risk assessment in order to mitigate the identified risks
• And the ongoing monitoring and review of the risk assessment and its methodology 

Adverse media screening helps banks across these four pillars. It is critical to the comprehensive identification and assessment of ML/TF risks, and without this true picture, banks cannot effectively allocate resources or conduct appropriate ongoing monitoring.

Adverse media and a risk-based approach in the EU

The EU’s new planned regulations are designed to harmonize the supervision of banks across member states and provide coordinated oversight of how well they’re implementing a risk-based approach in their AML/CFT programs. In light of this new regulatory rulebook, banks must assess customers, products, services, geographical areas, and distribution channels, considering risk variables and factors identified at the EU level. 

A truly risk-based approach requires banks to conduct a comprehensive assessment of the risks they – and their customers – are exposed to. Adverse media is essential to this across several key areas:

• Ultimate beneficial owners (UBOs): The new EU regulations detail an expanded list of requirements relating to ultimate beneficial owners (UBOs). These include determining who should be subject to Identification and Verification (ID&V) by calculating thresholds and determining control for beneficial ownership transparency by assessing every level of ownership.
  
  Adverse media checks are a key way of unearthing this information, ensuring that firms remain compliant while also mitigating the risk of conducting business with an entity that may result in lasting reputational damage. 

• Terrorist financing: Transaction volumes related to terrorism can be low, making them harder to detect. This is a challenge exacerbated by the rise of so-called “lone wolf” actors, who may not have a wide nexus of collaborators and co-conspirators. Adverse media screening provides another channel through which banks can identify persons related to suspicious organizations and entities.
   
• Politically Exposed Persons (PEP) screening: As part of the EU’s new regulatory framework, it plans to allocate risk ratings to obliged entities. One element used to calculate this will be a bank’s customer base – including the number and share of PEPs. Screening PEPs against a range of trusted news sources globally to understand potential connections to criminal behavior will therefore be essential. Adverse media may unearth information about the financial crime/reputational risk of a customer that official PEP/RCA lists may not.
• Ongoing monitoring: The new EU regulations state that the “intensity of monitoring” should be determined by the bank’s risk-based approach, taking into account the characteristics of customers, risk levels, products and services offered, as well as geographical areas of concern. Specifically, the rulebook states that systems must be able to allow firms to identify categories of customer that are a concern. Real-time adverse media tools will enable banks to categorize customers based on FATF and EU guidance, making it easier for firms to demonstrate their compliance. 

How to build and maintain dynamic risk ratings

As banks continue to grow, they need to ensure that adverse media checks can scale with their customer bases. In particular, they need to ensure their alerts avoid generating high numbers of false positives that have to be cleared manually, and risk slowing down customer onboarding. 

Dynamic risk scoring of customers is key to achieving this. Real-time adverse media tools will enable banks to configure the types of media insights they want to receive proactively, reducing false positive hit rates. Direct integration into company workflows can also reduce remediation times.