What is customer screening & why is it important for AML?

Customer screening is the primary procedure businesses follow when conducting anti-money laundering and counter-terrorist financing (AML/CTF) activities. Because it’s such an important and frequent process, it significantly impacts a firm’s ability to operate efficiently and comply with global regulations.

This article will cover:

• What it takes to implement an effective AML customer screening process.
• The most common issues businesses face when devising screening procedures.
• How technology can help businesses screen customers more effectively and efficiently.

What is customer screening in AML?

Customer screening in AML is the process of identifying and assessing the risk profiles of new and existing customers so that financial institutions (FIs) know exactly who they are dealing with. This involves checking customers against various databases, such as sanctions lists, politically exposed persons (PEP) lists, and adverse media sources, to detect any potential involvement in illegal activities. 

The goal is to ensure compliance with regulatory requirements and prevent the institution from being exploited for money laundering, terrorism financing, or other financial crimes.

Why is client screening important?

Financial businesses worldwide are required by regulations to implement effective customer screening policies and procedures. These are crucial because they ensure criminals cannot exploit legitimate financial services for nefarious purposes.

However, customer screening processes also have a significant impact on businesses themselves.

If the screening and monitoring procedures aren’t effective at identifying criminals, businesses are exposed to severe reputational damage and regulatory penalties. At the same time, if these processes aren’t conducted efficiently enough, they cost the business time and money every time a new customer is onboarded.

These costs add up quickly. Every additional minute it takes a business to screen a legitimate customer is an extra minute the customer has to wait to get the service they would like to use. So, in practice, customer screening processes directly impact the customer experience, the business’ reputation, and its bottom line.

AML regulations governing customer screening

Customer screening practices are mandated by know your customer (KYC) protocols, AML laws, and global anti-terrorism measures enforced by governments.

In the US, customer screening is mandated by the Unifying and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (USA Patriot Act), which was implemented in the wake of the September 11 attacks. The US Financial Crimes Enforcement Network (FinCEN) enforces this regulation in accordance with the Financial Industry Regulatory Authority’s (FINRA) Rules 2090 and 2111.

In the EU, all member states are required to implement the ‘new’ 6th Anti-Money Laundering Directive, which sets out ‘mechanisms…for the prevention of the use of the financial system for the purposes of money laundering or terrorist financing.’

In the UK, the Money Laundering Regulations of 2017 set out the rules for KYC and customer screening based additionally on guidance provided by the European Joint Money Laundering Steering Group and the Financial Conduct Authority (FCA).

This guidance is laid out clearly in the recommendations put forward by the Financial Action Task Force (FATF) and implemented globally by organizations such as The Middle East and North Africa Financial Action Task Force (MENAFATF) and the Financial Action Task Force of Latin America (GAFILAT). Specifically, the recommendations state:

Financial institutions should develop programmes against money laundering and terrorist financing. These programmes should include:

1. The development of internal policies, procedures and controls, including appropriate compliance management arrangements, and adequate screening procedures to ensure high standards when hiring employees.
2. An ongoing employee training programme.
3. An audit function to test the system.

Source: The FATF Recommendations, updated November 2023

The key components of an effective AML client screening process

Businesses implementing customer screening processes typically involve at least six distinct procedural components.

1. Customer due diligence (CDD): Before a commercial relationship is established, businesses are required to conduct due diligence processes to verify the information customers provide, including their names, dates of birth, addresses, and account information. All customers are subject to this scrutiny, so businesses need to be able to take these steps promptly and efficiently.
2. Enhanced due diligence (EDD): If the information provided is discrepant or the business uncovers any reason to subject the customer to additional scrutiny, the customer must undergo EDD. This involves a more thorough investigation into the customer’s details, businesses, and transactions and typically takes longer.
3. Sanctions screening: An integral part of any customer screening program is cross-referencing the customer name against the publicly available lists of individuals, businesses, and countries that are subject to sanctions globally. Should a customer be implicated directly or by association on such a list, the business will need to subject them to the additional scrutiny of EDD procedures.
4. PEP screening: Businesses also need to determine if the customer in question is listed as a PEP. This might be due to their direct involvement in political activity, such as their job or title, but may also be due to their association with someone holding political office. Notably, businesses need to keep checking such lists as changes in political circumstances around the world may change a customer’s status at any time.  
5. Adverse media screening: Besides checking publicly available sanctions and PEP lists, businesses also need to routinely screen customers against negative or adverse news stories published worldwide as they may implicate customers in criminal activity. This kind of screening needs to be conducted routinely to keep up with world events. It’s also crucial for businesses to track news events in different languages.
6. Ongoing monitoring: It is not enough for businesses to screen customers and their names before they begin transacting with them. An integral part of appropriate customer screening is the ongoing monitoring of all customers over the course of the commercial relationship to ensure that businesses are prepared for changes in the customers’ circumstances, emerging news, and updates to global lists.

Common challenges when implementing customer screening

Customer screening is a critical layer of defense in ensuring criminals aren’t able to use their resources to exploit legitimate businesses. At the same time, businesses must use their own resources to implement these processes, raising several key challenges for them. Chief amongst them are:

• Data quality issues: To effectively screen customer information against multiple lists from around the world, businesses need to ensure they have access to reliable data sources. If the data doesn’t update frequently enough or is incorrect in any way, it could lead to false positives and negatives. False positives make screening processes take longer, wasting time and frustrating customers. False negatives expose businesses to reputational damage and regulatory fines.
• Employee productivity issues: At an operational level, compliance and customer onboarding teams must be able to screen customers thoroughly and efficiently. If employees need to access multiple systems and screens to do this, it slows them down and keeps customers waiting. Crucially, it makes it more expensive for businesses to then scale these processes as they grow.
• Customer experience issues: While customer screening processes are necessary to help businesses manage risk, they also mean it takes customers longer to get what they’re paying for. The longer it takes a business to verify a legitimate customer, the more frustrated that customer is likely to become. In an intensely competitive landscape, this can often affect how likely a customer is to work with a given business in the future.

Best practices for effective customer screening

Given the complexity and inter-connectedness of the challenges businesses face when implementing customer screening, it’s worth considering the following best practices:

• Implement a risk-based approach: Businesses should implement customer screening processes based on a deliberate risk-based approach that accounts for the degrees of risks they are willing to take. That might mean lighter screening procedures for some customers and enhanced processes for others. The important thing is to detail these specifics in terms of policies and implement procedures based on this thorough analysis.
• Use automation to gain leverage: To ensure employees can screen customers quickly and confidently, businesses can use software and automation to traverse the vast data of global lists and dynamically update client risk scores based on new information. This ensures processes move at a faster pace, and new employees can be added to compliance teams with less friction.
• Prioritize staff training: Technology can help businesses screen customers more efficiently, but ultimately, these processes rely on the judgment and intuition of employees. By investing time and effort in improving documentation and employee education, businesses can ensure their screening procedures are implemented with the appropriate care and discretion each customer requires.
• Conduct routine audits: Once implemented, every customer screening program needs to be rigorously tested and scrutinized objectively. Under the pressure of meeting quarterly benchmarks, it’s easy to overlook the issues that might emerge when processes are actually applied. So, it’s vital to routinely audit the program, looking for weaknesses, inefficiencies, and opportunities for improvement.

Market-leading AML customer screening software

Financial businesses of all sizes use ComplyAdvantage to balance the efficiency and effectiveness of their customer screening programs at scale. Here’s how it makes a difference:

• By streamlining the onboarding process, businesses utilize advanced AI technology to screen new customers against a variety of risk factors, including sanctions, PEPs, watchlists, adverse media, and enforcement data. 
• ComplyAdvantage enables access to complete customer profiles conveniently on a single screen. This simplifies the automation of risk assessments, allowing businesses to focus on prioritizing customers who pose the highest risk.
• The platform also offers capabilities to analyze the team’s screening workload easily and maintains a comprehensive record of all case decisions in one centralized location. This functionality is critical to ensuring compliance teams are always prepared for an external audit.

BigPay improves analyst efficiency with integrated customer screening

Award-winning FinTech BigPay experienced these benefits first-hand when it decided to partner with ComplyAdvantage for customer screening to replace its manual, ad hoc processes. The firm needed a flexible, unified platform that could scale across multiple markets and handle volume spikes during periods of peak demand. Furthermore, BigPay needed a solution to automate workflow processes for name screening and adverse media searches, freeing up analyst time for more in-depth investigations. With ComplyAdvantage, BigPay was able to custom-build a single proprietary interface connecting multiple tools, trackers, and databases via a single API. The financial services firm also set up unique screening profiles for its individual markets, providing proportional controls for different products and transaction types – such as remittance and e-money. Accessible search profile configuration and fuzziness fine-tuning streamlined the process of aligning with new regulations.

“We now have the benefit of researching sanctions, PEPs, and adverse media all at the same time from a large number of sources rather than using multiple tools and databases. The time saved comes from only having to research the alerts, rather than wasting time looking for them.”

Ashwin Nazareth, FinCrime Operations & Disputes Principal, BigPay