10 years of litigation and five weeks of trial where concluded in two days by the federal jury which reached its verdict: “The Bank” is liable to the plaintiffs for providing material support in the form of financial services to a designated Foreign Terrorist Organisation (FTO).
This is one of the Anti-Terrorist Act suits in the hunt for hundreds of millions of dollars in damages; hundreds of plaintiffs claimed that the “Bank” is liable for terror attacks. The claim was that the Bank maintained accounts and transferred funds to individuals and charities, which were alleged fronts for FTO. Consequently, the complaint was that that Bank’s services caused injuries and that it knew that its services would facilitate terror attacks. There were attempts to demonstrate that the “Bank” did not have sufficient AML (anti-money laundering) checks and procedures in place, and that its automated monitoring systems and internal controls were inadequate.
In response, the “Bank” attempted to demonstrate that all transactions were electronically processed and screened against the OFAC (Office of Foreign Assets Control) blacklist, which identifies all U.S. designated FTOs, Specially Designated Global Terrorists (SDGTs) and Specially Designated Nationals (SDNs).
This case served as a warning to the international financial institutions. The fact that the “Bank’s” traditional AML programs did not prevent the bank from providing financial services to FTOs, proves that the use of such programs is no longer sufficient to keep financial institutions protected. Financial Institutions are required to do more than apply conventional procedures of running names into automated filters and screening them against international and national blacklists. They must use all information available and build reasonable assumptions from such information to aggressively avoid supporting illicit activities, including terrorism.
One important source of information that Banks should pay attention to is the adverse media or negative news. There is a reasonable risk coupled with conducting business with individuals or entities having an adverse media profile - Reputationally Exposed Persons (REPs). Those individuals or entities with an adverse media profile represent a significant risk to institutions. Though the latest revised guidelines for AML and Counter Terrorist Financing (CTF) do not make specific reference to adverse media and do not provide instruction or standard recommendations for Enhanced Due Diligence, the Financial Action Task Force’s (FATF) revised guidelines do mention media searches for recognising and validating Politically Exposed Persons (PEPs).
The absence of the recommendations and the instructions on how to deal with adverse media has created a challenge for institutions on how to interpret and implement these guidelines. In addition, the limitation of procedures and approaches to find and verify REPs and the lack of comprehensive screening programs that include effective methodology for identifying REPs, makes it very difficult to identify customers with high reputational risk.
The emerging trends in financial crimes have created a need to explore new approaches using advanced analytics, dynamic client risk rating and a new standard for negative news with monitoring ability. There is a huge gap between what is required for sound AML and CFT risk management and what the current situation for most financial institutions is.
A 2013 survey on AML Risk Assessment and Customer Due Diligence noted that 67 percent of respondents found news/ negative news a helpful source of information when conducting Enhanced Due Diligence (EDD).
The message from regulators to the institutions has been quite clear; identifying and closing gaps in AML programs is essential. In order to do so, institutions must be willing to adopt new ideas and implement the technology that far exceeds minimum requirements.
The Financial Institution should be able to manage reputational risk effectively through the combination of advanced detection algorithm, sophisticated matching techniques and fresh comprehensive risk data that includes not only Sanctions and Politically Exposed Persons, but also Adverse Media profiles and other sources of information; internet, social media, etc., that will support well-informed due diligence decisions and facilitate further investigation by proactively looking into negative news beside the officially regulated risk data.
The institution should also move from Rule-Based to Risk-Based behavior monitoring solutions that will facilitate advanced predictive analysis. This will allow the institutions to identify, assess and understand the AML and CTF risks that they are exposed to and take preventive measures that are proportionate to the nature of risks in more effective way.
To extend the efficiency of all solutions, the institution could also introduce intelligence to the AML and CTF environments by integration with smart tools such as visualisation, data link analytics and advanced crime analytics. The purpose is to enhance the process of research into the substantial amounts of data from different sources; regulatory risk information, local blacklists, back office systems, adverse media, etc. to reveal hidden patterns and undisclosed correspondences which will allow your AML and CTF programs to become a preventive tool that helps operating the business in a safer manner rather than being just a system to satisfy regulatory requirements.
By Deya Innab, Director, Product Management at EastNets