A Guide to Anti-Money Laundering for Crypto Firms

Delivering a risk-based approach with adverse media

Adverse Media Challenger Banks Knowledge & Training

At the heart of all anti-money laundering and terrorist financing (AML/TF) regulation is the risk-based approach (RBA). The RBA recognizes that the risk profile of a bank’s customers varies widely and thus risk mitigation measures need to be proportionate. While the principle of the RBA has been around for many years it is only relatively recently that regulators around the world, in response to Financial Action Task Force (FATF) guidance, are forcing its implementation in the institutions they supervise. FATF recommends that adverse media searches are performed on an entity if mentioned negatively in the news which could be an indication of higher risk.

In July 2022, the US Board of Governors of the Federal Reserve System stated that: ‘Banks must apply a risk-based approach to customer due diligence (CDD), including when developing the risk profiles of their customers.’ The statement goes on to develop this in more detail, making clear its expectation that banks will fully implement and adopt these principles in compliance with BSA/AML requirements. 

A similar picture is evident in other major financial centers. Regulators in Canada, the UK, EU, and other major financial centers around the world are implementing a risk-based approach to supervision and expect banks and other financial institutions to adopt the same approach.

In the EU, the latest directive for implementation – commonly known as 6AMLD – further strengthens anti-money laundering and terrorist financing requirements by providing a standardized definition of 22 predicated offenses that constitute money laundering. It also expands the penalties and criminal liabilities for failure to prevent money laundering.

Adverse media screening has become an essential element of a bank’s anti-money laundering defenses and is even more important in the implementation of a risk-based approach. 

In carrying out a risk assessment at client onboarding for both individuals and businesses, managing higher-risk relationships requires access to adverse media data to mitigate a wide range of criminal activities, particularly if this could lead to money laundering and terrorist financing.

Therefore, adverse media solutions must be designed to meet the full range of risk categories that may be encountered in AML/CFT customer due diligence checks. AML regulations specifically identify that enhanced due diligence measures be taken if there is political exposure, activity in higher-risk jurisdictions, any previous adverse risk history, or unusual circumstances. In these situations, adverse media screening must be carried out.

The risk-based approach also recognizes that risk is dynamic and the profile of a customer onboarded as ‘low risk’ can quickly change. Traditionally, banks have applied periodic reviews to all customers updating KYC at variable time periods depending on the initial risk assessment. However, the risk-based approach demands a system that can generate alerts as soon as there is a significant change in the risk profile to avoid potential future problems. Often referred to as perpetual KYC, real-time ongoing monitoring of existing customers means being alerted to new risk events with an existing customer to prompt an investigation. Regulators are placing greater emphasis on this aspect as the effectiveness of AML controls is under the spotlight.

Traditional methods of obtaining adverse media from either search engines or databases are unsuitable for real-time monitoring and increasingly banks in the US, Canada, and Europe are turning to solutions that are driven by AI, meaning they’re capable of accessing data from millions of data points on the internet and combining them into actionable risk intelligence in near real-time. 

Delivering improved outcomes with adverse media

Adverse media data that is specifically related to the wide range of predicate offenses defined by the FATF (and now included in the broadened scope of the new Anti-Money Laundering Act in the US) is critical in effectively managing higher levels of customer risk.

Managing risk doesn’t mean straying into de-risking, however. The Federal Reserve Governors statement goes on to say: ‘The Agencies continue to encourage banks to manage customer relationships, and mitigate risks based on customer relationships, rather than decline to provide banking services to entire categories of customers.’

Smart firms are capitalizing on this and gaining a commercial advantage by implementing a robust risk-based approach using technology-driven adverse media solutions to automate many of these processes. This frees up compliance teams’ time, enabling them to properly understand, analyze, and interpret risks for effective decision-making.

Adverse media screening remains an increasingly important aspect of a well-rounded AML program. Although guidance for screening against adverse media could seem less structured initially than other regulatory requirements related to CDD, sanctions, or PEPs, compliance professionals are encouraged to use state-of-the-art tools and automated solutions to reduce manual efforts and not just meet, but exceed, regulatory requirements.

Transaction monitoring smart alerts

Celent report: Maximizing the Value of Adverse Media Monitoring

For this report, leading research and advisory firm Celent interviewed global banks from across the world, providing practical tips on how adverse media can be integrated into an existing AML value chain.

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To explore more about the practical benefits of adverse media for compliance teams, explore the pieces below:

Originally published October 27, 2022, updated November 11, 2022

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