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Dow Jones Watchlist White Paper

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Dow Jones Watchlist White Paper

  1. 1. The New Step by Step Approach to Client Screening White Paper | August 2008 Part I Dow Jones Watchlist
  2. 2. Successful Screening Rupert de Ruig Managing Director Dow Jones Risk & Compliance Rupert de Ruig is the Managing Director of the Risk & Before Reuters, Mr. de Ruig worked in France, Den- Compliance business for Dow Jones which includes mark, Italy and the UK with a number of IT system the Dow Jones Watchlist service that supports finan- integration companies. Based in the UK Mr. de Ruig cial institutions requirements to “know your customer” is a frequent speaker at numerous global industry for Politically Exposed Person and other entity risk. In events and conferences hosted by organizations such this role, Mr. de Ruig is responsible for the research, as the Financial Integrity Network, Complinet, IMLPO, product and business development of the database Euro Finance Week and Money Laundering Alert. He which since its inception in 2001 is now used has been invited by PricewaterhouseCoopers to lead enterprise wide in eight of the top ten global financial a high-level training as part of their Fight Against institutions. Financial Crime modular program. Mr de Ruig has also written numerous articles for international publi- Mr. de Ruig has more than 12 years experience in the cations and worked closely with global regulators and information industry and has worked with many of the Financial Institutions to tackle the Politically Exposed world’s largest financial institutions on data manage- Person risk management challenge. ment, market intelligence and Anti Money Laundering projects. Before joining Dow Jones, he worked for For more articles by the same author please go Reuters where he managed their key global consul- to www.solutions.dowjones.com/watchlist/press tancy and telecoms accounts. The New Step by Step Approach to Client Screening Copyright © 2008 Dow Jones Watchlist. All rights reserved.
  3. 3. Successful Screening Table of Contents ......................................................................................................................................................................................................................................................................................................... Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 The Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Total Cost of Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 The Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Managing the Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Government Sanctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Politically Exposed Persons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 The Building Blocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Mapping the Journey – Identifying Steps to Take on The Risk Journey. . . . . . . . . . . . . . . . . . . . . . . . 8 Mapping the Journey – The Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Mapping the Journey – The Step by Step Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 The New Step by Step Approach to Client Screening Copyright © 2008 Dow Jones Watchlist. All rights reserved.
  4. 4. Successful Screening Introduction ......................................................................................................................................................................................................................................................................................................... In this white paper, Rupert de Ruig, Managing Anti-money laundering (AML) screening—the sys- This paper is based on the experience Dow Jones has Director of Dow Jones Risk & Compliance, examines tematic screening of existing and prospective client gained working with some of the worlds leading how today’s anti-money laundering and compliance identity details against a commercial database of financial institutions since 2001 to tackle this unique officers and industry vendors must embrace a “one names of persons and entities, is a simple enough challenge and examines how a risk based single step step at a time” philosophy as a practical solution to task in theory. However, the impact of an ineffective approach is the key to managing costs whilst the gigantic challenges posed by commercial watch solution cripples anti-money laundering control and enhancing effectiveness. The shift towards targeted list screening. leads to spiraling cost and reputation damage. risk-based screening marks the beginning of a new “ phase in the evolution of client screening. One size no “ longer fits all. Regulated firms are now embracing the The shift towards targeted risk-based screening marks the beginning risk-based approach methodology. By applying a of a new phase in the evolution of client screening. combination of factors to their client and transaction screening they are reducing cost and increasing the says Rupert de Ruig, Managing Director of Dow Jones Risk & Compliance effectiveness of the process. “Every Journey Begins with a Single Step” –Chinese Proverb The New Step by Step Approach to Client Screening 1 Copyright © 2008 Dow Jones Watchlist. All rights reserved.
  5. 5. Successful Screening The Challenges ......................................................................................................................................................................................................................................................................................................... Anti-money laundering (AML) screening represents line” in AML screening that produces seismic shocks such a significant challenge because the primary through the process magnified by scale, poor quality information used in the process, people’s names, is data and ineffective technology. an imperfect identifier and not fit for purpose. Most The challenge is significant for everyone involved in names, whether first names, family names or both AML and counter terrorist financing (CTF). Applying together, are shared by many others. loose matching criteria to cope with these challenges Increased migration and international linguistic group- can lead to a tsunami of false positives. Conversely, ings, means names are shared internationally. This is focusing only on exact matches can result in poten- true not just of your ‘John Smith’s, ‘Maria Garcia’s, tially damaging false negatives. ‘Deepak Patel’s, or ‘Wang Luxing’s. It is also true of Regulated institutions therefore feel condemned to your ‘Osama bin Laden’s, ‘Augusto Pinochet’s and laborious, comprehensive and resource-intensive ‘Robert Mugabe’s. Moreover, names are not screening processes. As a result, by far the biggest standardized or fixed for life – they can be spelt, investment in any screening programme will often be transliterated and changed in many legitimate the people that lead and support it. With the wrong ways. commercial watch list and technology investment this Short of giving every human a unique global identifier, cost can spiral out of control leading to the employ- our names will continue to be the primary identifier for ment of tens, hundreds and extreme cases thousands AML screening. This is a critical and intractable “fault of people to monitor systems and clear matches. “ With the wrong commercial watch list and technology investment “ this cost can spiral out of control leading to the employment of tens, hundreds and extreme cases thousands of people to monitor systems and clear matches. The New Step by Step Approach to Client Screening 2 Copyright © 2008 Dow Jones Watchlist. All rights reserved.
  6. 6. Successful Screening Total Cost of Ownership ......................................................................................................................................................................................................................................................................................................... Can we put a cost on all this? Well one way of expensive and scarce compliance staff. measuring the impact is people cost. A rule of thumb would indicate that institutions using a good The math is no more comforting for the smaller insti- tution with a smaller client base and fewer AML PeoPle € £ $ screening vendor should expect at best a 1% resources. The example shows the benefit of focusing matching rate per 100,000 records in a commercial on keeping the records from the commercial watch watch list database when checking for all risk list as low as possible when AML screening to reduce TECHNOLOGY categories. €$ the number of hits whilst at the same time ensuring The table below illustrates that compliance costs grow that a significant risk is not missed. directly in relation to the size of the commercial watch Not surprisingly, screening is seen as one of the LISTS list used, a fact that will need to be taken into careful biggest AML challenges currently facing regulated $ consideration by those responsible for recruiting institutions. The response is a growing acknowledg- ment that today’s AML programs requiring a holistic Example 1 Example 2 approach, professional execution and ever-more No. of records in sophisticated systems. commercial watch list . . . . . . 500,000 900,000 In short the challenge is huge but every journey begins No. of records in with a single step. customer database. . . . . . . . 1,000,000 1,000,000 This is where vendors can help. The deployment of Average match rate* . . . . . . . 5% 9% quality systems and data, and the application of a Total number of matches . . . 50,000 90,000 granular data structure are the keys to enabling institutions to significantly improve the effectiveness Average time to clear match . . . . . . . . . . . 2 mins 2 mins of their screening whilst keeping people costs to a minimum. Total person days required to clear matches** . . . . . . . . 208 375 *based on 1% match rate per 100,000 records in commercial database ** based on an 8 hour working day The New Step by Step Approach to Client Screening 3 Copyright © 2008 Dow Jones Watchlist. All rights reserved.
  7. 7. Successful Screening The Risks ......................................................................................................................................................................................................................................................................................................... Faced with these costs, some financial institutions are • Money laundering and terrorist financing risk: tempted to adopt the ostrich position, hoping the The risk of being used by a criminal or terrorist to regulator will not spot the ineffectiveness of a current facilitate a criminal or terrorist activity. Potential system, if one exists at all. But this is not a realistic penalties: The shame of facilitating the harm to option. The risks and consequences of failures are just society that financial targeting is designed to too great: counter. • legal risk: The risk of breaching sanctions legisla- tion by having as a new or existing customer, or effecting a transaction with or for, an individual or entity on an official sanctions list. Potential penalties: a criminal record, a fine, imprisonment. • Regulatory risk: The risk of failing to meet regula- tory expectations for the quality of risk management. This risk is not dependent on actually having breached sanctions legislation – ‘failing’ an inspec- tion is enough. Potential penalties: significant monetary penalties, expensive remedial activity (including look-backs) and a sharp increase in the AML budget. • Reputation risk: The risk of having any legal or regulatory failings as above publicly exposed in the media. These days, legal or regulatory sanctions are not just a matter of market gossip. They are published to the world. Potential penalties: Bad publicity, and not just a nine days' media wonder – the ‘Google’ effect lasts for many years. The New Step by Step Approach to Client Screening 4 Copyright © 2008 Dow Jones Watchlist. All rights reserved.
  8. 8. Successful Screening Managing the Risks ......................................................................................................................................................................................................................................................................................................... So, in today’s global financial markets institutions are Only a risk-based approach can make the problem caught between a rock and a hard place. Potentially manageable, by: punitive legal or regulatory sanctions on the one hand • Expressing a thought-through risk appetite. have to be balanced by an open-ended potential for • Enabling resources deployed to be proportionate to a multitude of matches and cost of ownership on the the risks. other. That is why AML programs now impact the • Minimizing the disturbance of client relationships. heart of an institution and AML projects are on the • Providing a documented basis for satisfying board room agenda, involving significant up-front and regulators as to the quality of compliance and ongoing investment. risk management. Given this, what are the primary objectives of any screening programme? The essence of a risk-based approach to screening is to deploy a combination of systems and policies to The primary goals of any institution are to: tackle different levels and types of risks, in different • Consider their clients as an opportunity for growth ways. This approach enables financial institutions to rather than a threat. manage effectively the regulatory and business risk of • Manage the risks without unduly impacting their screening for financial sanctions and Politically growth. Exposed Persons (PEPs). • Implement a Know Your Customer (KYC) process that is sustainable and cost efficient. The New Step by Step Approach to Client Screening 5 Copyright © 2008 Dow Jones Watchlist. All rights reserved.
  9. 9. Successful Screening Government Sanctions Politically Exposed Persons .............................................................................................. ................................................................................................................................................................................................... Cynics see financial sanctions as gesture politics: the However, the net widens exponentially - from the Another stark difference with sanctions list entries is official stigmatisation of an individual, entity, activity “known to be bad” to the “may-be bad” – in the sec- that – as we need to keep reminding ourselves - there or regime for purely moral and political effect. ond major screening risk category of Politically is nothing intrinsically wrong with dealing with a PEP. Exposed Persons (PEPs). Many would see Tony Blair, Colin Powell, Ban However, sanctions do have a genuine pragmatic Ki-Moon, or Mikhail Gorbachev as highly desirable rationale. They increase the risk, and the price, of If sanctions are guided missiles, PEP regimes are and respectable clients. Today in July 2008 any insti- perpetrating evil. Cut off their financial oxygen, runs merely radar systems, scanning for hits, requiring the tution would be proud to have Nelson Mandela as a the argument, and bad people will have to stop their operators to analyze the strength, direction, shape customer, for example. nefarious activities and come to the surface. Bad etc. of a hit in order to decide whether it is friend or foe, regimes will be brought to their knees, nuclear prolif- innocent or suspicious. At the same time, history has shown that some PEP eration will be frustrated, and criminal assets will be job roles are certainly riskier than others. Recently There is a huge number of PEPs in the world. For confiscated. Dow Jones published an analysis of the 21 job roles example, the global Dow Jones Watchlist database that make up their proprietary PEP Definition. The Financial sanctions are guided missiles. They have contains over 400,000 unique records of PEPs, their analysis identified the ten job roles globally with the specific named (however imperfectly) target individu- relatives & close associates. This number alone illus- greatest risk of involvement in money laundering, illicit als, entities, activities or countries, all the targets are trates that PEP screening needs to be treated very payments, corruption and other illegal activity. Topping officially defined as bad, and the obligations on differently to sanctions screening. the chart are heads of state and national government. institutions (to block accounts and transactions) are clear-cut. The numbers are also relatively small compared to other risk categories. Whilst there are very many “ “ separate government sanction lists throughout the world, most of them copy each other and in practice If sanctions are guided missiles, many tens of thousands of entries can be consoli- PEP regimes are merely radar systems... dated down to around 8,000 unique records from all the major official financial sanctions lists. If institutions only had to focus on financial sanctions targets, they might feel that they had a difficult, but manageable, job. The New Step by Step Approach to Client Screening 6 Copyright © 2008 Dow Jones Watchlist. All rights reserved.
  10. 10. Successful Screening Politically Exposed Persons (continued) The Building Blocks ............................................................................................ .................................................................................................................................................................................................. DoW JoNeS ToP 10 The starting point for an effective screening name-matching software vendors to easily HIGH-RISK PeP RoleS programme has to be investment in: build sophisticated screening rules, ensuring false positives are minimized. 1. Heads & Deputies of State/National • A subscription to a commercial watch list data- base. These now perform an indispensable global Government • A name-matching software system, either devel- service. The best vendors deploy a corps of oped on a proprietary basis or, more usually, bought 2. Senior Members of the Armed Forces researchers, and quality control standards, to in from an external vendor, depending on the 3. National Government Ministers monitor world events and the global media on a age-old ‘build vs. buy’ debate. These systems are daily basis. They create, maintain, and make 4. Senior Members of the Secret Services designed to produce matches between entries in available in a timely fashion, reliable, up-to-date, 5. Heads & Deputy Heads of Regional commercial databases and names generated and comprehensive databases of sanctioned Government by the institution – existing customers, would- persons or entities, PEPs and other high-risk indi- be customers or counterparties of its customers. 6. Political Pressure and Labour Group viduals. These databases now carry hundreds of thousands of names and by their nature are growing Officials • People - as noted above, these tools have to be to reflect political change, research enhancements 7. City Mayors complemented by perhaps the biggest investment, and widening definitions of risk. 8. Political Party Officials in compliance staff. 9. State Corporation Executives • N.B. Purchasers need to be aware of the critical role These investments are not magic wands. They are the 10. Senior Members of the Police Services a commercial database plays in effective screening. starting point, not the destination. They are the indis- As well as providing comprehensive and accurate pensable tools that enable the institution to define and N.B. These are global statistics - definitions coverage of global risk, a vendor must provide implement its risk-based approach and this should be change from country to country, region to region. highly structured and consistent data that enables one of the primary criteria for their selection. “ This illustrates why PEP screening has to be managed on a very discriminating basis, and highlights the importance of prioritizing PEP job roles in order to increase screening efficiency. This technique will be “ The best vendors deploy a corps of researchers, and quality control standards, to monitor world events and the global explored in more detail. media on a daily basis. The New Step by Step Approach to Client Screening 7 Copyright © 2008 Dow Jones Watchlist. All rights reserved.
  11. 11. Successful Screening Mapping the Journey - Identifying Steps to Take on The Risk Journey ......................................................................................................................................................................................................................................................................................................... The objective of a step by step approach to suc- cessful AML screening is to segment workload into FIlTeRING manageable steps which can be prioritized according to risk, and tackled one by one. + Risk-based filtering and prioritization is the key to PRIoRITISATIoN this process. Filtering means choosing what names to match against. It involves deliberately choosing to match against some names, lists or categories but not RISK-BASeD against others. Prioritization means discarding a first- come-first-served approach in favor of risk-based rules for the order in which matching takes place and the depth with which follow-up investigatory activity is done. They are not mutually exclusive alternatives. They can and should be combined. eFFICIeNCY & Both these disciplines require the institution to make hard judgments about risk, guided by the touchstones eFFeCTIVeNeSS for all risk management – Impact and Probability. Where does the greatest risk of a match arising lie? What would the impact of missing a match be? Are there potential matches that are so unlikely to occur that they can rationally be discounted? SUCCeSSFUl The very risk-averse senior management may start from a very low risk appetite – but find the practicality SCReeNING and cost implications of such an approach daunting, exorbitant and ultimately impractical. The New Step by Step Approach to Client Screening 8 Copyright © 2008 Dow Jones Watchlist. All rights reserved.
  12. 12. Successful Screening Mapping the Journey – The Options Mapping the Journey – The Step by Step Approach .............................................................................................. ................................................................................................................................................................................................... What then are the main options for achieving Financial targeting by the authorities today remains As a result, screening (as with other AML practice) is a step by step approach through risk-based crude – financial sanctions based on wholly getting immeasurably smarter in the 21st century and filtering and prioritisation? inadequate data, a PEP regime of uncertain but we are entering a maturing phase where institutions Here is a list of eight options for applying a step by wide-ranging scope. are moving from “I must get a system” to “Does it step policy. work and what is the true cost of ownership?”. Institutions cannot change this in the short term. This puts a huge onus on them to be ever more smart Despite the formidable challenges, with the right mix themselves in order to minimize the false positives of people, technology and information on the one and negatives and to make their screening effective hand and intelligent, risk-based discrimination on the A STeP BY STeP APPRoACH and proportionate. To minimize the true cost of own- other, efficient and effective client screening is very To SCReeNING ership. possible. 1. Use a selective PEP definition by job role 2. Define country risk selectively 3. Exclude domestic PEPs 4. Focus on senior PEPs 5. Cull ex-PEPs 6. Select watch lists in line with risk Part II of this paper provides detailed analysis of each of these steps to help you complete your journey to screening success. 7. Use a risk-based name matching tolerance Go to: www.solutions.dowjones.com/watchlist/successfulscreening to 8. Apply high data standards download your copy. The New Step by Step Approach to Client Screening 9 Copyright © 2008 Dow Jones Watchlist. All rights reserved.
  13. 13. The New Step by Step Approach to Client Screening White Paper | August 2008 Part II Dow Jones Watchlist
  14. 14. Successful Screening Table of Contents ......................................................................................................................................................................................................................................................................................................... The Step by Step Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Use a Selective PEP Definition by Job Role. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Incorporate Country & Relationship Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Excluding Domestic PEPs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Focus on Senior PEPs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Cull ex-PEPs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Select Sanctions and Other Official Lists in Line With Risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Use a Risk-based Name Matching Tolerance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Apply High Data Standards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Part I of this paper is available to download at www.solutions.dowjones.com/watchlist/successfulscreening The New Step by Step Approach to Client Screening Copyright © 2008 Dow Jones Watchlist. All rights reserved.
  15. 15. Successful Screening The Step by Step Approach ......................................................................................................................................................................................................................................................................................................... In the first part of our white paper I described the challenges inherent in watch list checking: the fact that names are very far from being unique Use a selective PEP definition identifiers of particular persons, the limited data by job role in sanctions list entries and the broad but indeter- Incorporate minate scope of PEP regimes. I said that there is Apply high Country & data standards only one way to approach this journey – one step Relationship Risk at a time, and also referred to eight options for applying a one step at a time policy that enables institutions to manage screening risks effectively and control their costs. THE STEP BY In this complementary paper, we set out what Use a risk-based STEP PATH TO Exclude name matching each of these options means in practice. tolerance SUCCESSFUL domestic PEPs SCREENING This was our palette of eight options for a one step at a time approach: Select watch list Focus on in line with risk senior PEPs You do not have to use these options compre- hensively or use them in any particular sequence. Cull Your risk-assessment will enable you to decide which ex-PEPs options to use, in what order to use them, and how radically to use them. The New Step by Step Approach to Client Screening 10 Copyright © 2008 Dow Jones Watchlist. All rights reserved.
  16. 16. Successful Screening Use a Selective PEP Definition by Job Role ......................................................................................................................................................................................................................................................................................................... The uncertainty over the scope of the PEP regime has view is that we should be careful what we wish for. Organizations should rank roles by impact and prob- become one of the biggest sources of aggravation for The current regime should be embraced as a risk ability and implement that ranking through filtering and AML compliance officers. Dow Jones Watchlist management opportunity to focus on high level risk prioritization. For example, national office could be (formerly Factiva Public Figures and Associates) has for your institution, matching your geographic foot- treated as higher risk than regional office, regional been providing practical answers to the PEP defini- print, products and services and your risk appetite. office higher risk than local office, say. Or senior rank tion challenge since 2001. This is much more preferable to a draconian, higher risk than junior rank. Sibling or child higher risk prescriptive approach that would in practice create far than blood relative once removed. Majority share- Much of the following information and advice repre- more work in order to deal with a long tail of low risks. holder in the PEP’s company as higher risk than sents our experience in implementing screening auditor to the company. programs in many of the leading financial institutions With flexibility, you can parse, or segment, each in the world, including eight of the global top ten. presumed or possible PEP category of office or “ position and rank them from the point of view of Unfortunately global regulation will never be as potential risk (impact and probability). precise as we would like, given the unique nature of Dow Jones Watchlist has “ the risk and the desire of regulators to keep some Consider the huge difference in potential impact areas ambiguous. between being found, even if unknowingly, to be been providing answers to dealing with a family member or associate of the PEP definition challenge What makes up a solid PEP definition has been cov- ered by Dow Jones in previous papers and articles Pinochet, Abacha or Bhutto versus a member of the since 2001. supervisory body of a foreign State-owned enterprise. discussing definition challenges such as ‘prominent The excuse for ignorance is much weaker, the likeli- public functions’, ‘immediate family members’, ‘close hood of corruption much greater in the former case. In associates’. These can be viewed on our web site at: short, the Head of State is much higher risk than the www.solutions.dowjones.com/watchlist/press member of the supervisory body. Some view the current ambiguity and flexibility of Consider the significant difference in opportunity for current regulation as unhelpful and difficult. Recently corruption between a member of a government on the in North America some commentators have one hand and a member of a country’s court of audi- been calling for a more prescriptive approach. Our tors on the other. The New Step by Step Approach to Client Screening 11 Copyright © 2008 Dow Jones Watchlist. All rights reserved.
  17. 17. Successful Screening Incorporate Country & Relationship Risk ......................................................................................................................................................................................................................................................................................................... Given the nature of the PEP categories, the number of PEPs will be similar per country. But the degree of country risk will vary enormously. Incorporating country risk into your risk methodology can enable an institution to significantly reduce the number of entities they are screening against (and therefore false positives). For example some institu- tions can chose a very narrow PEP definition for low risk countries however broaden the coverage when screening international clients. Similarly the product, service or relationship the insti- tution has with a customer can also be used as a factor to govern the comprehensiveness of the content. Low risk products (and therefore clients) might need only to be checked against the local sanc- tions list and key PEP job roles for example. Ensuring you work with a watch list provider that offer consistently and an accurately organized content that enables you to select and screen against specific lists, job roles, risk categories and associations is therefore a critical part of successful AML screening. Source: http://www.transparency.org/policy_research/surveys_indices/cpi/2007 The New Step by Step Approach to Client Screening 12 Copyright © 2008 Dow Jones Watchlist. All rights reserved.
  18. 18. Successful Screening Excluding Domestic PEPs Focus on Senior PEPs .............................................................................................. .............................................................................................. Almost all PEP regulation around the world makes Whilst the official guidance of what job roles could be specific provision in regulation that domestic PEPs included in a PEP definition varies from region to need not be considered as PEPs. region, all regulators agree that they are only inter- ested in the senior positions. Unless an institution is based in a tax haven or a coun- try with significant banking secrecy laws, excluding Do middle ranking and junior officials have the domestic PEPs will significantly reduce the number of ability to abuse their positions and carry out true positive hits an institution gets as well as reduc- corrupt and illegal activity? Absolutely! But the ing the total number of PEPs to be screened against. math makes moving beyond a senior level impractical given the millions of public officials, officers, civil ser- Whilst this is a tempting prospect you do need to think vants etc. in the world. And that’s before you extend hard before excluding domestic PEPs from your PEP the coverage to their relatives and close associates. definition. Will your own customer record data quality enable you to do this? Does it match your Given the abundance of high quality information about risk appetite? Is extending regulation to cover public officials available on the internet, it is very easy domestic PEPs a natural next step, given the increas- for over-enthusiastic commercial watch list providers ing awareness of the damage caused by corruption… to add hundreds of thousands of public officials to if so, perhaps you might as well start now? their databases even though this will result in nothing other than yet more false positives. The solution is to This is a good example of the need to recognize the ensure that the commercial watch list you are using trade-off between Risk and Resources. has a precise senior coverage definition, applied in a consistent manner throughout the world, whilst reflecting any local regulatory tweaks. The New Step by Step Approach to Client Screening 13 Copyright © 2008 Dow Jones Watchlist. All rights reserved.
  19. 19. Successful Screening Cull ex-PEPs Select Sanctions and Other Official Lists in Line With Risk .............................................................................................. ............................................................................................................................................................................................. Commercial watch list vendors keep the dead and the There are a limited number of official sanctions lists, By including these lists, commercial watch list defunct in their databases in the interests of compre- issued (often following United Nations resolutions) by vendors perform the service of providing a hensiveness and historical audit trail. And the process national governments and the European Union. Given comprehensive risk management service. However of laundering ill-gotten gains can extend beyond term that it is these that carry the legal sanctions, most some of these individual lists contain tens of thou- of office or even, in the case of relatives and close as- institutions involved in international transactions will sands of entries of persons and entities that may not sociates, beyond death. decide to cover all entries of individuals and entities on fit your risk profile. Ranking different lists by impact all official financial sanctions lists, even though the and probability for the purposes of filtering and As the years go by it will be increasingly important for sanctions only apply within the jurisdiction or judicial prioritization will enable you to exclude low-risk lists you to define when a PEP stops being a PEP in order reach of the issuer (notoriously, in the case of the U.S., and further reduce the potential number of false to avoid checking against persons that no longer rep- financial sanctions reach can be global because of the positives. resent a risk and will solely generate false positive ways in which they impact $ transactions and US matches. The EU has said officially that institutions persons wherever located). may, on a risk-sensitive basis, stop treating a person as a PEP from one year after they cease to hold the Commercial watch list vendors do not just provide relevant office. sanctions and PEP lists. They also offer, for example, local or national Most Wanted lists of criminals and You should apply risk-based filtering and prioritisation persons wanted on suspicion of grave offences; policies as to the distance in time from being an ac- regulatory misdemeanour lists of entities and tive PEP that you continue to treat a PEP (and a PEP’s , persons fined or otherwise penalised by regulators; relatives or associates), as a PEP You could, for ex- . lists issued by international public bodies of entities ample, select a period of one year for low risk job roles involved in contractual irregularities; ‘notoriety’ lists of from low risk countries e.g. military officials from persons who have attracted negative media publicity. Nordic countries, a five year span for higher risk roles such as City Mayors, and at least a lifetime for Heads of State and their relatives and close associates. This process will significantly decrease the number of PEPs you are checking against and therefore the number of hits your staff will have to remediate. The New Step by Step Approach to Client Screening 14 Copyright © 2008 Dow Jones Watchlist. All rights reserved.
  20. 20. Successful Screening Use a Risk-based Name Matching Tolerance Apply High Data Standards ............................................................................................................................................................................................. .............................................................................................. As discussed earlier in this paper, politicians could Name-matching tools enable institutions to choose Data in many entries in sanctions lists are notoriously only have developed the sanctions and PEP regimes the closeness of match that constitutes a hit, limited. Lists are based on open sources, not just for in the belief that the matching of names is supported by a proprietary algorithm to measure this practical reasons but to minimize the risks of publish- mechanistically easy and that matching a name is closeness. A 100% match is an exact match of the ing false information. For obvious reasons, governments the same as matching a person. Experience has name (as transliterated) recorded in the watch list. A do not routinely have full names, addresses, dates shown how naïve this is. 90% match is a match on the record in the watch list and places of birth etc for wanted terrorists and plus some degree of tolerance of variations in spelling criminals. Perhaps more surprisingly, even members Take the spelling problem. Names do not have a or information (e.g. availability of a middle initial). of government do not routinely put personal informa- single, authoritative spelling. tion into the public domain, even over a long career. The higher the percentage match, the fewer hits will Most sanctions and watch lists are in roman script Less surprisingly, personal information about other be generated and the greater the risk that the and use transliterated names of Arabic, Chinese or categories of PEP is even more limited. institution will miss a near match that is a true match other names with a native non-roman spelling. rather than a false positive. Nevertheless, commercial watch list vendors do their Different but similar names can be given the same best to maximize the data associated with a name. transliterated equivalent. Even if the name is not For the purposes of filtering and prioritisation you The more complete the data, the easier it is for insti- transliterated, in many cultures names do not have should use a percentage match that reflects the risk tutions to avoid false positives. unique, authoritative spellings. (The given name being screened for in accordance with your risk appetite. ‘Muhammad’ was the second most common in the You can therefore do a lot to help yourself by: U.K. in 2007 if all fourteen different spelling variations • Data cleansing - for example, by eliminating dupli- used are taken into account.) cates across your databases, a notorious issue for Nor are names always available in the same form. multi-product, multi-company financial services Names on watch lists may be available as full names groups. (all family and given names) but are often available in • Obtaining and using additional date fields – espe- any permutation of family name, given name and initial. cially date or year of birth, but also country of nationality or residency, gender, place of birth. This can be used in conjunction with the closeness of match option. • Using, where relevant, original non-roman scripts and original spellings of names. The New Step by Step Approach to Client Screening 15 Copyright © 2008 Dow Jones Watchlist. All rights reserved.
  21. 21. Successful Screening Conclusion ......................................................................................................................................................................................................................................................................................................... As noted in the first part of this white paper, financial targeting by the authorities today remains crude – financial sanctions are based on wholly inadequate data, and PEP regulation will always remain ambiguous in scope. In response, screening is evolving – fast. Smart institutions are taking matters into their own hands and leveraging powerful new technology and data sources such as from Dow Jones to screen their risk more effectively. One-size no longer fits all and firms utilising a risk- based approach are, step by step, winning the battle to have an effective programme at an acceptable cost. The New Step by Step Approach to Client Screening 16 Copyright © 2008 Dow Jones Watchlist. All rights reserved.
  22. 22. Successful Screening About Dow Jones Watchlist About Dow Jones For Further Information Used by eight of the ten largest, global financial insti- Dow Jones & Company is a subsidiary of News Website: tutions, Dow Jones Watchlist is statistically proven to Corporation (NYSE: NWS, NWS.A; ASX: NWS, NWSLV; be the most accurate, complete, and up-to-date list of www.newscorp.com). Dow Jones is a leading www.solutions.dowjones.com/watchlist senior PEPs, their relatives and close associates. provider of global business news and information services. Its Consumer Media Group publishes The Email: Additional comprehensive coverage of national and Wall Street Journal, Barron’s, MarketWatch and the international sanction lists, and persons convicted of, or watchlist@dowjones.com Far Eastern Economic Review. Its Enterprise Media linked to, high-profile crime, allows our customers to Group includes Dow Jones Newswires, Factiva, Dow minimize the risk of taking on the wrong customer and Jones Client Solutions, Dow Jones Indexes and Dow comply effectively with anti-money laundering regulation. Jones Financial Information Services. Its Local Media Group operates community-based information franchises. Dow Jones owns 50% of SmartMoney and 33% of Stoxx Ltd. and provides news content to radio stations in the U.S. Since 1882, the Dow Jones name has been synonymous with accuracy, integrity and trust. The New Step by Step Approach to Client Screening 17 Copyright © 2008 Dow Jones Watchlist. All rights reserved.

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