Getting to Grips with "Adverse information" and AML

December 2017 Kompli-Global

Of particular note is the UK’s thriving company formation industry. The country’s light-touch approach to start-ups forming a company is incredibly successful in encouraging entrepreneurialism and fostering economic growth, but the lack of oversight means that it is easy for fraudsters to set up shell companies through which they can move money.

The Government’s own National Risk Assessment of Money Laundering and Terrorist Financing has acknowledged that the country’s protocols are not currently up to the challenge of detecting fraudulent start-up companies. It is clear that the Government needs to find ways of improving the way it monitors and researches the individuals and entities seeking to form new companies, so it can take steps to prevent the creation of businesses that act as a front for illegal activities.

But it’s not just up to the Government to try to close this gap in our defences. Legitimate, law-abiding businesses too need to act to ensure that they remain above reproach when it comes to money laundering, by making sure they fully know who their customers and other partners really are. For a long time now, these Know Your Customer (KYC) programmes have entailed not simply verifying a person’s identity, but having due diligence analysts fully explore their background by searching for “adverse information”.

What is adverse information? Adverse information – also known as “negative news” or “derogatory information” – is often seen by AML professionals as newspaper articles reporting information about local, national or international crime. Searching for such articles is an essential for any strong AML compliance programme however, these searches entail much more than just seeking out newspaper stories. It should include any kind of unfavourable information found across a wide variety of news sources – both ‘traditional’ news outlets and those from unstructured sources and not just in the company’s home country, but from around the world.

Both paragraph 20 of the ESA’S Final Guidance on Risk Factors for financial institutions and page 65 of the JMLSG’s Prevention of Money Laundering guidance require companies to seek out information about a customer or beneficial owner relating to allegations of criminality or terrorism. According to these guidelines, institutions need to determine whether there are adverse media reports against a potential customer, as well as whether they or anyone closely associated with them have had their assets frozen due to administrative or criminal proceedings. They should also identify whether the customer has been the subject of a suspicious transactions report in the past, and they must find out if they have their own in-house information about the customer’s integrity.

The ESA Risk Factors guidance also explains that the credibility of allegations should be considered on the basis of the quality and independence of the source of the data and the persistence of reporting of these allegations, among other considerations. Firms should note that the absence of criminal convictions alone may not be sufficient to dismiss allegations of wrongdoing.

The US understanding of “negative news” is similar – due diligence analysts operating in the American market are required not simply to find negative newspaper stories, but to search for “all publicly available relevant risk information.”

In both these regions then, AML programmes must always ensure they fully research all possible media channels for adverse information in order to be effective and safe from regulatory and enforcement penalties. If an AML officer thinks “negative news” is a term related to media reports and not much else, then their regime is likely weak and ineffective.