Effective customer screening has never been so critical in protecting your company from a myriad of associated risks, but also in accelerating that all important time-to-revenue for new business. The challenge for any regulated business which must conform to AML regulations in their jurisdiction, is achieving that balance between screening and onboarding new customers quickly, whilst remaining compliant and screening entities thoroughly and effectively.
We’ve put together a series of blogs outlining how to create a risk-based approach to effective customer screening to turbo-charge your AML & KYC processes.
Why screening matters
Screening is the process of dynamically comparing the data you hold on customers, prospective customers, suppliers and counterparties against third-party data for risk management purposes. Effective screening will take advantage of both structured data (sanctions, PEPs, watch lists) and unstructured data (such as adverse media).
The principal objectives of screening are to manage the risk of doing business with ‘bad actors’ (such as sanctioned or wanted persons) and to identify customers or prospective customers who pose an elevated risk of criminality (such as politically exposed persons) so that appropriate action can be taken to manage risk through, for example the application of enhanced due diligence (EDD).
The over-arching aim is to manage your organisation’s exposure to money laundering, terrorist financing or any other form of predicate criminality such as bribery and corruption, or tax crimes. In recent years, there’s been an increasing focus on the benefits of reputational risk management through adverse media screening which compares customers against less formal data sources for early indications of potential risk. These indicators might include information about an individual prior to the commencement of a criminal process, or to them becoming subject to sanctions.
Which businesses need to screen their customers?
The types of business that are legally required to screen their customers vary between jurisdictions. In nearly all countries there is an ‘AML regulated sector’ and businesses that fall within its ambit are required to screen as part of their Know Your Customer (KYC) obligations.
The types of business commonly included in the regulated sector include:
- Banks and credit institutions
- Investment businesses
- Money services businesses
- Company & trust administration businesses
- Law firms
- Insurance providers
- Accountancy practices
- Real estate agents
- Dealers in high value goods
- Gaming businesses
If you are unsure whether your business is regulated for AML purposes your industry body or trade association will be able to clarify the rules that apply to you.
Screening is also widely employed by businesses that fall outside the AML regulated sector to help protect against the risk of reputational damage that might arise from doing business with certain customers or becoming inadvertently involved with some form of predicate criminality. Bribery and corruption, for example, is particularly acute in the natural resources, armaments and pharma industries.
Every screening solution is comprised of two components:
- A screening engine – the technology that runs the data analysis and produces the results
- The external data against which user customer data is compared
The data is the fuel that drives the engine, and a screening engine is only as good as the fuel that’s put into it.
There are three types of screening tool:
Point/Manual screening – this form of screening tool requires users to manually input the name of the customer they wish to screen. The tool then outputs the results on a customer by customer basis
Batch screening – a screening engine to which customer names are uploaded and screened automatically with whatever regularity the business determines (normally overnight). The engine outputs results in relation to all customers for which there are potential screening matches
Adverse media screening – screening against adverse media sources can be done either as a one-off action or as part of a batch process. It takes into account a much broader set of source data, helps to provide early warning of issues that may arise – or warning of issues that don’t fall within the scope of traditional screening categories – but carries with it the risk of high numbers of false positives if not done correctly.
The challenge for businesses wishing to optimise their compliance performance is to firstly identify what kind of screening they’re required to undertake, either by the regulatory environment or investor expectations. Then they need to identify the best screening engine technology combined with the best quality data so that they benefit from the most accurate results whilst reducing the number of false positives.
