Onboarding a client with a bad reputation and history can put your company at risk of aiding and abetting money laundering, and as a result, jeopardize the future of your company.
You might be asking what is the meaning of adverse media? How do you screen clients for negative news? What does the law say about adverse media checks? What are the sources of adverse information and where to check for them?
To answer your questions, we’ve written a complete guide for better understanding. Let’s proceed with the definition of adverse media.
As the name implies, negative news or adverse media is defined as any sort of bad information discovered across various sources. A proper adverse media check can expose a person’s or an organization’s complicity in money laundering, terrorist financing, financial fraud, racketeering, organized crime and so much more.
For example, let’s assume a potential client was recently accused of a crime. Before the court proceedings begin or if it’s in progress, there’s no reason to list this individual on any crime watch-list and there’s little or no adverse content on them. However, that individual already poses a risk to your company, even though it’s uncertain if they are guilty or not.
This usually involves scanning the sources listed above for the client’s name and address. A thorough analysis of all relevant information is necessary when building your customer’s profile and determining their reputation. Some of this information may be a new or pending investigation. Multiple negative information indicates that the customer poses a substantial level of risk to your company, so further due diligence is necessary.
Adverse media checks are part of the ongoing customer risk assessment procedure and should be done at a higher frequency for high-risk clients. This is because negative information such as web articles accusing an individual of fraud, can increase their risk-rating and lead to a Suspicious Activity Report filing.
The negative news is enough reason to conduct further due diligence on a customer or their beneficial owner. The scope of negative news is not limited to an allegation or conviction related to financial crimes, a client’s bad reputation is enough to pose risks.
In accordance with FinCEN’s final rules on the criteria for Customer Due Diligence, legal entities should formulate risk-based procedures to decide if and when further screening of client’s names through negative media sources, would be applicable.
The Risk Factors Guidelines under the EU’s 4th AML directive outline the need for legal entities to perform adverse media searches as part of the Enhanced Due Diligence process for high-risk customers. Adverse media searches should also be applied when increasing the quantity of information obtained for CDD purposes.
Here’s what the FATF Recommendations say about adverse media checks and negative news screening concerning cross-border banking with correspondents.
“Financial institutions should understand the client’s reputation, including if they were previously investigated for money laundering, terrorist financing, or if they faced regulatory penalties. In essence, an adverse media check is necessary when dealing with high-risk customers.”
To understand factors that determine whether a customer poses a high risk to your business, see our article on enhanced due diligence here.
When assessing the risk associated with a client or their beneficial owners’ reputation: firms should check the credibility of negative news, its frequency, and the quality and independence of the source. It is important to note that the absence of news on criminal convictions alone may not be sufficient to dismiss allegations of crimes.
Adverse media screening is time-consuming and grossly ineffective when done manually. The firm carries out internet searches for negative news on the client, who was selected as a result of their risk-based approach. Then they cross-check the results with their client’s profile to determine if the individual or corporation mentioned in the negative news corresponds with the client’s identity.
The limits of internet searches such as language barriers and limited access to some sources also mean that few pieces of adverse media will go unnoticed.
When you operate a fast-growing business with an influx of new clients, it’s difficult to sustain the manual process of individually screening each customer for negative news.
But with automated systems like ours, not only will you know who to screen, you will be able to screen customers in bulk across a vast array of databases and news sources, and receive only risk-relevant results. Consequentially protecting your company from reputational risks and giving you a deeper insight into what it really means to know your customer.
Negative media is information that is threatening to one’s reputation, such as involvement in fraud, money laundering, etc. found in news, social networks and any other media channels.
The company itself must disclose all of their beneficiaries upon a business verification check. Read our blog for more insights on UBOs.