Updated: Sep 20, 2020
The presumption of innocence is arguably the cradle of most criminal justice systems of the world.
The presumption of innocence is arguably the cradle of most criminal justice systems of the world. The phrase “Innocent until proven guilty” has existed in the same format since sixth century AD originating in the Roman law.
While in modern criminal proceedings this notion is still the same, meaning that the defendant is considered to be blameless unless it is proven otherwise, it has however a wholly different essence in the context of anti-money laundering screening.
Article 13, paragraph 1 (a) of the 5th Anti money laundering/ Counter Terrorist Financing Directive (AML/CTF) suggests that an obliged entity (company that is obliged to follow AML/CTF directives) shall “identify the customer and verify the customer’s identity on the basis of the documents, data or information obtained from a reliable and independent source”.
This provision and in conjunction with the necessity of ongoing monitoring, basically have created an obligation for all regulated entities to take into account all adverse/negative media about the customer and/or the beneficial owner.
The requirement of Know Your Customer/Client (KYC) has evolved into a complex ongoing process and simplistic practices of the past such as verification of name, address and ownership are no longer acceptable or effective.
A regulated entity should, as an ongoing process, monitor and evaluate its customers reputation, assess the information and apply the appropriate level of customer due diligence measures.
The risk factor guidelines issued by the Joined Committee of the European Supervisory Authorities suggest that one of the main risk factors when considering the risk associated with a customer’s or beneficial owners’ reputation is whether there are any “adverse media reports or other relevant sources about the customer”.
This goes to show of how important it is in 2020 to take into account and evaluate such open source information. Therefore, through ongoing monitoring the compliance officer should identify any adverse media and take them into account when creating the economic profile of the customer or during the annual review of the customer and its beneficial owner(s).
By failing to apply appropriate customer due diligence can lead to hefty fines, penalties and some cases loss of license. Duff & Phelps seventh annual Global Enforcement Review shows that “the first half of 2020 has seen an uptick in AML fine values globally totaling $706 million compared to 2019’s full-year-total of $444 million” and the most frequently cited compliance violation is inadequate customer due diligence.
Consequently, it is evident that the global focus is for obliged to carry out appropriate due diligence measures based on all available information, evaluated on a case by case format.
How to tackle adverse media alerts
As established above the compliance department should identify, evaluate, assess and manage open source information about their customers and/or their ultimate beneficial owner(s).
This information may lead the obliged entity to apply enhanced customer due diligence and in some occasions the compliance officer filling a suspicious activity report to applicable authorities. That is the expected modus operandi, however the reality is much more complex.
There is a never-ending confrontation between the compliance department and customer relationship department.
Customer relationship managers usually seek to discredit and disregard adverse media as in most instances these negative media alerts are allegations prior to any court proceedings or criminal establishment of guilt; therefore, a customer relationship manager always favours the notion of innocent until proven guilty. In contrast the compliance officer is obliged to take into account such media and take appropriate measures to mitigate any risks arising from such information.
Arguably, the best course of action is to find the right balance between the relationship of the customer and the establishment of appropriate due diligence measures.
The only way to do so is by evaluating such media findings and establishing the following:
· Is the source reliable and credible?
· Assess the quality and independence of the source
· Evaluate the persistence of the media reports (how many are there)
· The age of the media (recent or old)
· What is the nature of the media report?
· Evaluate the bias if any of the media company promoting the report
· Evaluate the locality of the reports (local, national or international)
· Evaluate the actions of the customer (if the allegations are false what has the customer or UBO done to eliminate them?)
· Has any regulator or government agency taken any action pursuant to the negative media?
· Has the customer already brought the negative media and/or allegations to the attention of your firm and offered a logical explanation?
· Given these matters are in the media, in the public domain, has the client satisfactorily answered any questions you may have posed, pursuant to the negative media alert and/or allegations?
Merely disregarding or discrediting media reports because there is no conviction (at this moment) or proof beyond reasonable doubt is not the proper action in today’s complex financial world. One must remember that people and firms are wrongly accused or escape criminal proceedings because of failure to sufficiently evidence their guilt every day and therefore an obliged entity must find the right balance in mitigating AML/CTF risks while having a healthy relationship with its customers.
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