How to apply the risk-based approach to customer batch screening

The Issue of uniform screening & too many false positives

Financial crime staff will be very familiar with the “risk based approach” (RBA) first encouraged in the 2005 Third EU Money Laundering Directive and subsequently mandated in the 2012 Financial Action Task Force (FATF) Recommendations. However, historically, batch screening has been the one area of AML compliance practice to which it has not been possible to apply the risk based approach. AML regulations require businesses to apply their AML controls in a risk based manner, however the inherent limitations of traditional batch screening tools have forced businesses to screen customers, irrespective of their risk profile, in a uniform fashion. As a consequence high risk PEP relationships have been batch screened with the same frequency and against the same search parameters as plain vanilla low risk customers.

This has resulted in businesses having to make an unpalatable choice – whether to treat all customers as they would their high risk customers, with a loose match algorithm, resulting in a deluge of false positives, or whether to take the opposite approach and treat their high risk customers in the same way as lower risk relationships, reducing the number of false positives but also the degree of confidence they have that high risk relationships are being screened with sufficient thoroughness.

One dangerous consequence of the absence of risk based batch screening is the inability of businesses to deal with potential matches in a risk based fashion.

Case study

A private bank batch screened its entire customer base utilising a legacy batch screening tool that was not flexible enough to allow the bank to risk sensitise the search parameters.

As a result the bank’s higher risk customers were screened in an identical way to its lowest risk customers. One of the higher risk customers, a Middle Eastern PEP became subject to a bribery and corruption investigation relating to a suspected armaments contract. The bank’s regulator conducted a review of the bank’s relationship with the PEP, paying particularly close attention to whether the bank had managed the relationship in compliance with its AML obligations. The regulator concluded that the bank’s AML systems and controls were deficient because they were not risk based. That conclusion was reached in part because of the limitations of the bank’s legacy batch screening system.

The solution

RiskScreen Batch allows users to set risk-based parameters for customers with varying risk grades thereby enabling them to automatically overnight batch screen higher risk customers differently to lower risk customers. It enables higher risk customers to be screened with greater frequency and precision, including by reference to the treatment of metadata. Learn more about how RiskScreen Batch can help your compliance function virtually eliminate false positives and apply the risk-based approach to your batch screening regime here.

RiskScreen Batch also flags matches by reference to the nature of the potential match allowing users to prioritise the handling of higher risk, more dangerous potential matches.

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