The media as a source of reputational protection, rather than risk
Chrisol Correia is head of global AML at LexisNexis Risk Solutions
For better or worse, financial institutions are more risk averse than ever. This is the direct result of continuing and growing regulatory scrutiny over a broad range of activities, including the compliance of financial institutions in areas such as international sanctions, the prevention of money laundering, the funding of terrorism or the facilitation of tax evasion, writes Chrisol Correia
Yet increased scrutiny over risk does have negative consequences – the difficulty of diplomatic missions in obtaining banking services, or the difficulties of smaller charities in accessing finance are two notable examples. Financial institutions are left with a difficult balance between the benefits of taking on new business, versus the difficult to judge risk of incurring a major regulatory penalty.
Arguably for many financial institutions, the balance of accepting new business today is weighted towards risk mitigation rather than revenue creation. Related to this, is that many of the tools used by financial institutions to ensure compliance and understand Anti-Money Laundering (AML) risk, such as the monitoring of international sanctions or politically exposed people (PEP) lists, are simply no longer enough in isolation. This is for two reasons, first, not all risky individuals make it onto an international watchlist. Second, many of those named on international sanctions lists will be aware of this fact, and will be deliberately trying to avoid the sanctions system. That means that the risk to the bank comes not from the individual, but from his or her associates, partners or even family who may be asked to engage with the bank on the sanctioned individual’s behalf.
Financial institutions therefore need a better and improved understanding of a given individual’s risk. Part of this is also because overall risk is increasing. Terrorism, for example, is more globalised and financially-savvy than ever before. As a separate example the impact of falling oil prices on nations subject to sanctions means that we may see an increasing amount of capital flight – some of which will undoubtedly be a major source of regulatory and reputational risk.
Financial institutions can gain a better and improved understanding of a given individual’s risk through adverse media screening. At its heart, this is about using information provided by the media to inform decision making. An example of a result from adverse media screening could be a story linking a given businessman to an emerging issue on tax evasion and fraud. Or, alternatively, a story linking an individual subject to international sanctions with a wider family network who may then be used to transfer money on that individual’s behalf.
Traditional adverse media screening, such as the information gathering outlined above, is nothing new, and was traditionally completed manually, perhaps via a Google search at point of customer acquisition, or perhaps even a news clipping service supplied by a PR firm. Modern media screening however is a more sophisticated affair, and reflects the requirements of financial institutions today, the relevance of compliance to the wider business and both the availability and complexity of the information sources available.
The sheer amount of information available is overwhelming and unsurprisingly, a human faces inherent difficulties in filtering the 30+ trillion pages of information available, in a wide range of languages, on Google alone, and this becomes even more difficult once non-traditional sources such as Twitter or blogs are factored in. Effective media monitoring is no longer limited to keeping up with what the Financial Times is reporting, but instead it is being aware of what the Financial Times is likely to report on next – and that requires a close watch on less conventional channels such as Twitter. For these reasons we’re seeing a shift away from manual monitoring, to a reliance on automation via big data analytics.
One use of these analytical systems is to normalise, link and structure the unstructured data provided by the media into a structured report on a given individual. This means that much of the “filtering”, normally conducted by an analyst – such as working out who a story relates to, what the story means for the business, and importantly – whether the source can be trusted, is conducted automatically. This in turn, not only speeds up the process but also ensures that analysts can spend their time on what matters – analysis of the implications of media results that are already known to be about the client in question.
To address the time lag between a story breaking and the creation of a structured report, many banks are now taking a two-step process. Searching first against structured reports, and then using a media analysis tool to make a search of unstructured news. By shifting from a search engine to a dedicated media analysis tool, the search is not only made more accurate, but is limited to influential news sites only – cutting down on the sheer volume of information an analyst needs to process.
The second shift, is the use of technology to meet the requirements of financial institutions today. For example, traditional adverse media screening usually took place at point of customer acquisition or during a regular account review. Unfortunately, as the fines levied at banks have shown, this is neither detailed nor fast enough – by the time a risk has been detected, the damage has been done. Instead, by shifting to a data analytics based approach, adverse media screening can be made automatic – with the system alerting to new stories about customers in real time, which enables a bank to take immediate action to reduce its risk exposure
The final important shift, is that financial institutions are using data analytics to present a single global view of a customer, which reflects the modern reality that risks are specific to the customer, rather than the business division. For example, it’s relevant to the entire institution that the retail banking division knows that a given customer is a company officer in an offshore investment vehicle. Unfortunately however, this information is often held in silo, isolated from the wider business. By using data analytics to create a compliance workflow that shares information, financial institutions can make better use of the information that they have access to internally.
Regulatory requirements continue to shift, and the trend is towards greater scrutiny. This requires financial institutions to not only know their customers, but sometimes know their customer’s customer, business partners or even spouse in order to properly understand and respond to the risk facing their business. This is undoubtedly a difficult thing to get right, and the trend towards risk aversion within the sector is regrettable, albeit understandable.
There is however another way. By using data analytics and adverse media as part of a wider customer screening process, financial institutions can obtain a better understanding of the risks that they are exposed to. Of course, responding to this information appropriately is the next part of the challenge. That one of the sources of this reputational protection now originates with the media, once viewed as a source of reputational risk, demonstrates the shifts currently taking place within the industry as a result of the use of data analytics.
