Everyday we conduct due diligence before visiting a restaurant or buying an expensive product, to know it’s worth the price and experience. In the financial world, a comprehensive check is necessary when minimizing the risks a client can expose a company to.
So before on-boarding customers, it is compulsory to check not only sanctions lists and for Politically Exposed Persons (PEP), but also adverse information on the customer to mitigate risks in times of unfavorable events. Let’s understand the meaning of adverse information and its purpose in customer risk assessment.
What is Adverse Information?
Adverse information is simply defined as any negative information about a potential client or customer that may hamper or expose an institution to risks. Adverse information checks are usually part of Customer Due Diligence and other KYC procedures.
This kind of information includes news of involvement in fraud, money laundering, terrorism financing, human rights abuse, narcotics dealing and tax evasion.
Like all pieces of information, adverse information can be obtained from a variety of sources such as the Internet, traditional and social media, and specified databases. The validity of the source plays a small role in determining the relevance of the information.
Adverse Information in Ongoing Risk Assessment
Adverse information does not have to be proven facts to be considered relevant. Suspicions and allegations of crimes are worth taking into account to avoid association. For this reason, most financial institutions, regulated heavily by KYC / AML policies, are obliged to check for adverse information to ensure the transparency of every transaction.
A common type of adverse media is past criminal record. For example, law enforcement agencies are more likely to suspect an individual with a criminal record of committing a crime.
This is applicable to customer risk assessment because an individual with no criminal history is less likely to be involved in involved in financial crimes like money laundering and consequentially, pose lower risks to a company.
Appearing on any sanctions list is also negative news because it shows an involvement in crimes, given that citizens of most countries are prohibited from dealing with entities listed on a sanctions list.
Adverse Information in AML regulations
Most AML regulations require checking for adverse information on every customer. Financial regulators, including FinCEN, require financial institutions to develop risk-based procedures to determine if and when further screening of client’s names through adverse information sources would be necessary.
Other AML laws, like the 4th anti-money laundering directive, require all obliged legal entities to perform adverse information checks during Customer Due Diligence.
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