Dow Jones Watchlist White Paper

The New Step by Step Approach to Client Screening

Dow JonesWatchlist

White Paper | August 2008

Part I

Successful Screening

The New Step by Step Approach to Client ScreeningCopyright © 2008 Dow Jones Watchlist. All rights reserved.

Rupert de RuigManaging DirectorDow Jones Risk & Compliance

Rupert de Ruig is theManaging Director of the Risk &Compliance business for Dow Jones which includesthe Dow JonesWatchlist service that supports finan-cial institutions requirements to “know your customer”for Politically Exposed Person and other entity risk. Inthis role, Mr. de Ruig is responsible for the research,product and business development of the databasewhich since its inception in 2001 is now usedenterprise wide in eight of the top ten global financialinstitutions.

Mr. de Ruig hasmore than 12 years experience in theinformation industry and hasworkedwithmany of theworld’s largest financial institutions on data manage-ment, market intelligence and Anti Money Launderingprojects. Before joining Dow Jones, he worked forReuters where he managed their key global consul-tancy and telecoms accounts.

Before Reuters, Mr. de Ruig worked in France, Den-mark, Italy and the UK with a number of IT systemintegration companies. Based in the UK Mr. de Ruigis a frequent speaker at numerous global industryevents and conferences hosted by organizations suchas the Financial Integrity Network, Complinet, IMLPO,Euro Finance Week and Money Laundering Alert. Hehas been invited by PricewaterhouseCoopers to leada high-level training as part of their Fight AgainstFinancial Crime modular program. Mr de Ruig hasalso written numerous articles for international publi-cations andworked closely with global regulators andFinancial Institutions to tackle the Politically ExposedPerson risk management challenge.

For more articles by the same author please gotowww.solutions.dowjones.com/watchlist/press

http://www.solutions.dowjones.com/watchlist


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


.........................................................................................................................................................................................................................................................................................................Table of Contents


Anti-money laundering (AML) screening—the sys-tematic screening of existing and prospective clientidentity details against a commercial database ofnames of persons and entities, is a simple enoughtask in theory. However, the impact of an ineffectivesolution cripples anti-money laundering control andleads to spiraling cost and reputation damage.


1

.........................................................................................................................................................................................................................................................................................................Introduction

In this white paper, Rupert de Ruig, ManagingDirector of Dow Jones Risk &Compliance, examineshow today’s anti-money laundering and complianceofficers and industry vendors must embrace a “onestep at a time” philosophy as a practical solution tothe gigantic challenges posed by commercial watchlist screening.

The shift towards targeted risk-based screening marks the beginningof a new phase in the evolution of client screening.says Rupert de Ruig, Managing Director of Dow Jones Risk & Compliance

“Every Journey Beginswith a Single Step”–Chinese Proverb

This paper is based on the experienceDowJones hasgained working with some of the worlds leadingfinancial institutions since 2001 to tackle this uniquechallenge and examines how a risk based single stepapproach is the key to managing costs whilstenhancing effectiveness. The shift towards targetedrisk-based screening marks the beginning of a newphase in the evolution of client screening. One size nolonger fits all. Regulated firms are now embracing therisk-based approach methodology. By applying acombination of factors to their client and transactionscreening they are reducing cost and increasing theeffectiveness of the process.“

“



2

Anti-money laundering (AML) screening representssuch a significant challenge because the primaryinformation used in the process, people’s names, isan imperfect identifier and not fit for purpose. Mostnames, whether first names, family names or bothtogether, are shared by many others.

Increasedmigration and international linguistic group-ings, means names are shared internationally. This istrue not just of your ‘John Smith’s, ‘Maria Garcia’s,‘Deepak Patel’s, or ‘Wang Luxing’s. It is also true ofyour ‘Osama bin Laden’s, ‘Augusto Pinochet’s and‘Robert Mugabe’s. Moreover, names are notstandardized or fixed for life – they can be spelt,transliterated and changed in many legitimateways.

Short of giving every human a unique global identifier,our nameswill continue to be the primary identifier forAML screening. This is a critical and intractable “fault

.........................................................................................................................................................................................................................................................................................................The Challenges

line” in AML screening that produces seismic shocksthrough the process magnified by scale, poor qualitydata and ineffective technology.

The challenge is significant for everyone involved inAML and counter terrorist financing (CTF). Applyingloosematching criteria to cope with these challengescan lead to a tsunami of false positives. Conversely,focusing only on exact matches can result in poten-tially damaging false negatives.

Regulated institutions therefore feel condemned tolaborious, comprehensive and resource-intensivescreening processes. As a result, by far the biggestinvestment in any screening programme will often bethe people that lead and support it. With the wrongcommercial watch list and technology investment thiscost can spiral out of control leading to the employ-ment of tens, hundreds and extreme cases thousandsof people to monitor systems and clear matches.

With the wrong commercial watch list and technology investmentthis cost can spiral out of control leading to the employment oftens, hundreds and extreme cases thousands of people to monitorsystems and clear matches.“ “


Can we put a cost on all this? Well one way ofmeasuring the impact is people cost. A rule of thumbwould indicate that institutions using a goodscreening vendor should expect at best a 1%matching rate per 100,000 records in a commercialwatch list database when checking for all riskcategories.

The table below illustrates that compliance costs growdirectly in relation to the size of the commercial watchlist used, a fact that will need to be taken into carefulconsideration by those responsible for recruiting

expensive and scarce compliance staff.

The math is no more comforting for the smaller insti-tution with a smaller client base and fewer AMLresources. The example shows the benefit of focusingon keeping the records from the commercial watchlist as low as possible when AML screening to reducethe number of hits whilst at the same time ensuringthat a significant risk is not missed.

Not surprisingly, screening is seen as one of thebiggest AML challenges currently facing regulatedinstitutions. The response is a growing acknowledg-ment that today’s AML programs requiring a holisticapproach, professional execution and ever-moresophisticated systems.

In short the challenge is huge but every journey beginswith a single step.

This is where vendors can help. The deployment ofquality systems and data, and the application of agranular data structure are the keys to enablinginstitutions to significantly improve the effectivenessof their screening whilst keeping people costs to aminimum.


3

.........................................................................................................................................................................................................................................................................................................Total Cost of Ownership

Example 1 Example 2

No. of records incommercial watch list . . . . . . 500,000 900,000

No. of records incustomer database. . . . . . . . 1,000,000 1,000,000

Average match rate*. . . . . . . 5% 9%

Total number of matches . . . 50,000 90,000

Average timeto clear match . . . . . . . . . . . 2 mins 2 mins

Total person days requiredto clear matches** . . . . . . . . 208 375

*based on 1% match rate per 100,000 records in commercialdatabase** based on an 8 hour working day

PeoPle € £ $

TECHNOLOGY€ $

LISTS$


Facedwith these costs, some financial institutions aretempted to adopt the ostrich position, hoping theregulator will not spot the ineffectiveness of a currentsystem, if one exists at all. But this is not a realisticoption. The risks and consequences of failures are justtoo great:

• legal risk: The risk of breaching sanctions legisla-tion by having as a new or existing customer, oreffecting a transaction with or for, an individual orentity on an official sanctions list. Potentialpenalties: a criminal record, a fine, imprisonment.

• Regulatory risk: The risk of failing to meet regula-tory expectations for the quality of riskmanagement.This risk is not dependent on actually havingbreached sanctions legislation – ‘failing’ an inspec-tion is enough. Potential penalties: significantmonetary penalties, expensive remedial activity(including look-backs) and a sharp increase in theAML budget.

• Reputation risk: The risk of having any legal orregulatory failings as above publicly exposed in themedia. These days, legal or regulatory sanctions arenot just a matter of market gossip. They arepublished to the world. Potential penalties:Bad publicity, and not just a nine days' mediawonder – the ‘Google’ effect lasts for many years.


4

.........................................................................................................................................................................................................................................................................................................The Risks

•Money laundering and terrorist financing risk:The risk of being used by a criminal or terrorist tofacilitate a criminal or terrorist activity. Potentialpenalties: The shame of facilitating the harm tosociety that financial targeting is designed tocounter.



5

.........................................................................................................................................................................................................................................................................................................Managing the Risks

Only a risk-based approach can make the problemmanageable, by:

• Expressing a thought-through risk appetite.• Enabling resources deployed to be proportionate tothe risks.

• Minimizing the disturbance of client relationships.• Providing a documented basis for satisfyingregulators as to the quality of compliance andrisk management.

The essence of a risk-based approach to screeningis to deploy a combination of systems and policies totackle different levels and types of risks, in differentways. This approach enables financial institutions tomanage effectively the regulatory and business risk ofscreening for financial sanctions and PoliticallyExposed Persons (PEPs).

So, in today’s global financial markets institutions arecaught between a rock and a hard place. Potentiallypunitive legal or regulatory sanctions on the one handhave to be balanced by an open-ended potential fora multitude of matches and cost of ownership on theother. That is why AML programs now impact theheart of an institution and AML projects are on theboard roomagenda, involving significant up-front andongoing investment.

Given this, what are the primary objectives of anyscreening programme?

The primary goals of any institution are to:

• Consider their clients as an opportunity for growthrather than a threat.

• Manage the risks without unduly impacting theirgrowth.

• Implement a Know Your Customer (KYC) processthat is sustainable and cost efficient.



6

...................................................................................................................................................................................................Politically Exposed Persons

Cynics see financial sanctions as gesture politics: theofficial stigmatisation of an individual, entity, activityor regime for purely moral and political effect.

However, sanctions do have a genuine pragmaticrationale. They increase the risk, and the price, ofperpetrating evil. Cut off their financial oxygen, runsthe argument, and bad people will have to stop theirnefarious activities and come to the surface. Badregimes will be brought to their knees, nuclear prolif-eration will be frustrated, and criminal assets will beconfiscated.

Financial sanctions are guided missiles. They havespecific named (however imperfectly) target individu-als, entities, activities or countries, all the targets areofficially defined as bad, and the obligations oninstitutions (to block accounts and transactions) areclear-cut.

The numbers are also relatively small compared toother risk categories. Whilst there are very manyseparate government sanction lists throughout theworld, most of them copy each other and in practicemany tens of thousands of entries can be consoli-dated down to around 8,000 unique records from allthe major official financial sanctions lists.

If institutions only had to focus on financial sanctionstargets, they might feel that they had a difficult, butmanageable, job.

Government Sanctions..............................................................................................

Another stark difference with sanctions list entries isthat – aswe need to keep reminding ourselves - thereis nothing intrinsically wrong with dealing with a PEP.Many would see Tony Blair, Colin Powell, BanKi-Moon, or Mikhail Gorbachev as highly desirableand respectable clients. Today in July 2008 any insti-tution would be proud to have Nelson Mandela as acustomer, for example.

At the same time, history has shown that some PEPjob roles are certainly riskier than others. RecentlyDow Jones published an analysis of the 21 job rolesthat make up their proprietary PEP Definition. Theanalysis identified the ten job roles globally with thegreatest risk of involvement inmoney laundering, illicitpayments, corruption and other illegal activity. Toppingthe chart are heads of state and national government.

However, the net widens exponentially - from the“known to be bad” to the “may-be bad” – in the sec-ond major screening risk category of PoliticallyExposed Persons (PEPs).

If sanctions are guided missiles, PEP regimes aremerely radar systems, scanning for hits, requiring theoperators to analyze the strength, direction, shapeetc. of a hit in order to decidewhether it is friend or foe,innocent or suspicious.

There is a huge number of PEPs in the world. Forexample, the global Dow Jones Watchlist databasecontains over 400,000 unique records of PEPs, theirrelatives & close associates. This number alone illus-trates that PEP screening needs to be treated verydifferently to sanctions screening.

If sanctions are guided missiles,PEP regimes are merely radar systems...“

“


The starting point for an effective screeningprogramme has to be investment in:

• A subscription to a commercial watch list data-base. These now perform an indispensable globalservice. The best vendors deploy a corps ofresearchers, and quality control standards, tomonitor world events and the global media on adaily basis. They create, maintain, and makeavailable in a timely fashion, reliable, up-to-date,and comprehensive databases of sanctionedpersons or entities, PEPs and other high-risk indi-viduals. These databases now carry hundreds ofthousands of names and by their nature are growingto reflect political change, research enhancementsand widening definitions of risk.

• N.B. Purchasers need to be aware of the critical rolea commercial database plays in effective screening.As well as providing comprehensive and accuratecoverage of global risk, a vendor must providehighly structured and consistent data that enables

name-matching software vendors to easilybuild sophisticated screening rules, ensuring falsepositives are minimized.

• A name-matching software system, either devel-oped on a proprietary basis or, more usually, boughtin from an external vendor, depending on theage-old ‘build vs. buy’ debate. These systems aredesigned to produce matches between entries incommercial databases and names generatedby the institution – existing customers, would-be customers or counterparties of its customers.

• People - as noted above, these tools have to becomplemented by perhaps the biggest investment,in compliance staff.

These investments are notmagicwands. They are thestarting point, not the destination. They are the indis-pensable tools that enable the institution to define andimplement its risk-based approach and this should beone of the primary criteria for their selection.


7

The Building Blocks..................................................................................................................................................................................................

The best vendors deploy a corps of researchers, and qualitycontrol standards, to monitor world events and the globalmedia on a daily basis.“

“DoW JoNeS ToP 10HIGH-RISK PeP RoleS

1. Heads & Deputies of State/National

Government

2. Senior Members of the Armed Forces

3. National Government Ministers

4. Senior Members of the Secret Services

5. Heads & Deputy Heads of Regional

Government

6. Political Pressure and Labour Group

Officials

7. City Mayors

8. Political Party Officials

9. State Corporation Executives

10. Senior Members of the Police Services

N.B. These are global statistics - definitionschange from country to country, region to region.

This illustrateswhyPEP screening has to bemanagedon a very discriminating basis, and highlights theimportance of prioritizing PEP job roles in order toincrease screening efficiency. This technique will beexplored in more detail.

............................................................................................Politically Exposed Persons (continued)


The objective of a step by step approach to suc-cessful AML screening is to segment workload intomanageable steps which can be prioritizedaccording to risk, and tackled one by one.

Risk-based filtering and prioritization is the key tothis process. Filtering means choosing what namesto match against. It involves deliberately choosing tomatch against some names, lists or categories but notagainst others.Prioritizationmeans discarding a first-come-first-served approach in favor of risk-basedrules for the order in which matching takes place andthe depthwithwhich follow-up investigatory activity isdone. They are not mutually exclusive alternatives.They can and should be combined.

Both these disciplines require the institution to makehard judgments about risk, guided by the touchstonesfor all risk management – Impact and Probability.Where does the greatest risk of a matcharising lie? What would the impact of missing amatch be? Are there potential matches that are sounlikely to occur that they can rationally bediscounted?

The very risk-averse senior management may startfrom a very low risk appetite – but find the practicalityand cost implications of such an approach daunting,exorbitant and ultimately impractical.


8

.........................................................................................................................................................................................................................................................................................................Mapping the Journey - Identifying Steps to Take on The Risk Journey

FIlTeRING+

PRIoRITISATIoN

RISK-BASeD

eFFICIeNCY &eFFeCTIVeNeSS

SUCCeSSFUlSCReeNING


Financial targeting by the authorities today remainscrude – financial sanctions based on whollyinadequate data, a PEP regime of uncertain butwide-ranging scope.

Institutions cannot change this in the short term. Thisputs a huge onus on them to be ever more smartthemselves in order to minimize the false positivesand negatives and to make their screening effectiveand proportionate. To minimize the true cost of own-ership.


9

Mapping the Journey – The Step by Step Approach...................................................................................................................................................................................................

Part II of this paper provides detailed analysis of each of these stepsto help you complete your journey to screening success.Go to: www.solutions.dowjones.com/watchlist/successfulscreening todownload your copy.

What then are the main options for achievinga step by step approach through risk-basedfiltering and prioritisation?

Here is a list of eight options for applying a step bystep policy.

Mapping the Journey – The Options..............................................................................................

A STeP BY STeP APPRoACHTo SCReeNING

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

7. Use a risk-based name matching tolerance

8. Apply high data standards

As a result, screening (as with other AML practice) isgetting immeasurably smarter in the 21st century andwe are entering a maturing phase where institutionsare moving from “I must get a system” to “Does itwork and what is the true cost of ownership?”.

Despite the formidable challenges, with the right mixof people, technology and information on the onehand and intelligent, risk-based discrimination on theother, efficient and effective client screening is verypossible.

http://www.solutions.dowjones.com/watchlist/successfulscreening

The New Step by Step Approach to Client Screening

Dow JonesWatchlist

White Paper | August 2008

Part II



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

.........................................................................................................................................................................................................................................................................................................Table of Contents

Part I of this paper is available to download atwww.solutions.dowjones.com/watchlist/successfulscreening

http://www.solutions.dowjones.com/watchlist/successfulscreening


This was our palette of eight options for a one step ata time approach:

You do not have to use these options compre-hensively or use them in any particular sequence.Your risk-assessment will enable you to decidewhichoptions to use, in what order to use them, and howradically to use them.


10

.........................................................................................................................................................................................................................................................................................................The Step by Step Approach

In the first part of our white paper I described thechallenges inherent inwatch list checking: the factthat names are very far from being uniqueidentifiers of particular persons, the limited datain sanctions list entries and the broad but indeter-minate scope of PEP regimes. I said that there isonly one way to approach this journey – one stepat a time, and also referred to eight options forapplying a one step at a time policy that enablesinstitutions to manage screening risks effectivelyand control their costs.

In this complementary paper, we set out whateach of these options means in practice.

THE STEP BYSTEP PATH TOSUCCESSFULSCREENING

IncorporateCountry &

Relationship Risk

Use a selectivePEP definition

by job role

Apply highdata standards

Use a risk-basedname matching

tolerance

Excludedomestic PEPs

Focus onsenior PEPs

Cullex-PEPs

Select watch listin line with risk


The uncertainty over the scope of the PEP regime hasbecome one of the biggest sources of aggravation forAML compliance officers. Dow Jones Watchlist(formerly Factiva Public Figures and Associates) hasbeen providing practical answers to the PEP defini-tion challenge since 2001.

Much of the following information and advice repre-sents our experience in implementing screeningprograms in many of the leading financial institutionsin the world, including eight of the global top ten.

Unfortunately global regulation will never be asprecise as we would like, given the unique nature ofthe risk and the desire of regulators to keep someareas ambiguous.

What makes up a solid PEP definition has been cov-ered by Dow Jones in previous papers and articlesdiscussing definition challenges such as ‘prominentpublic functions’, ‘immediate familymembers’, ‘closeassociates’. These can be viewed on our web site at:www.solutions.dowjones.com/watchlist/press

Some view the current ambiguity and flexibility ofcurrent regulation as unhelpful and difficult. Recentlyin North America some commentators havebeen calling for a more prescriptive approach. Our

Organizations should rank roles by impact and prob-ability and implement that ranking through filtering andprioritization. For example, national office could betreated as higher risk than regional office, regionaloffice higher risk than local office, say. Or senior rankhigher risk than junior rank. Sibling or child higher riskthan blood relative once removed. Majority share-holder in the PEP’s company as higher risk thanauditor to the company.

view is that we should be careful what we wish for.The current regime should be embraced as a riskmanagement opportunity to focus on high level riskfor your institution, matching your geographic foot-print, products and services and your risk appetite.This is much more preferable to a draconian,prescriptive approach that would in practice create farmore work in order to deal with a long tail of low risks.

With flexibility, you can parse, or segment, eachpresumed or possible PEP category of office orposition and rank them from the point of view ofpotential risk (impact and probability).

Consider the huge difference in potential impactbetween being found, even if unknowingly, to bedealing with a family member or associate ofPinochet, Abacha or Bhutto versus a member of thesupervisory body of a foreign State-owned enterprise.The excuse for ignorance is much weaker, the likeli-hood of corruptionmuch greater in the former case. Inshort, the Head of State is much higher risk than themember of the supervisory body.

Consider the significant difference in opportunity forcorruption between amember of a government on theone hand and a member of a country’s court of audi-tors on the other.


11

.........................................................................................................................................................................................................................................................................................................Use a Selective PEP Definition by Job Role

Dow Jones Watchlist hasbeen providing answers tothe PEP definition challengesince 2001.“ “

http://www.solutions.dowjones.com/watchlist/press


Given the nature of the PEP categories, the number ofPEPs will be similar per country. But the degree ofcountry risk will vary enormously.

Incorporating country risk into your risk methodologycan enable an institution to significantly reduce thenumber of entities they are screening against (andtherefore false positives). For example some institu-tions can chose a very narrow PEP definition for lowrisk countries however broaden the coverage whenscreening international clients.

Similarly the product, service or relationship the insti-tution has with a customer can also be used as afactor to govern the comprehensiveness of thecontent. 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 youworkwith awatch list provider that offerconsistently and an accurately organized content thatenables you to select and screen against specific lists,job roles, risk categories and associations is thereforea critical part of successful AML screening.


12

Incorporate Country & Relationship Risk.........................................................................................................................................................................................................................................................................................................

Source: http://www.transparency.org/policy_research/surveys_indices/cpi/2007

http://www.transparency.org/policy_research/surveys_indices/cpi/2007



13

Whilst the official guidance of what job roles could beincluded in a PEP definition varies from region toregion, all regulators agree that they are only inter-ested in the senior positions.

Do middle ranking and junior officials have theability to abuse their positions and carry outcorrupt and illegal activity? Absolutely! But themathmakesmoving beyond a senior level impracticalgiven the millions of public officials, officers, civil ser-vants etc. in the world. And that’s before you extendthe coverage to their relatives and close associates.

Given the abundance of high quality information aboutpublic officials available on the internet, it is very easyfor over-enthusiastic commercial watch list providersto add hundreds of thousands of public officials totheir databases even though this will result in nothingother than yet more false positives. The solution is toensure that the commercial watch list you are usinghas a precise senior coverage definition, applied in aconsistent manner throughout the world, whilstreflecting any local regulatory tweaks.

Almost all PEP regulation around the world makesspecific provision in regulation that domestic PEPsneed not be considered as PEPs.

Unless an institution is based in a tax haven or a coun-try with significant banking secrecy laws, excludingdomestic PEPswill significantly reduce the number oftrue positive hits an institution gets as well as reduc-ing the total number of PEPs to be screened against.

Whilst this is a tempting prospect you do need to thinkhard before excluding domestic PEPs from your PEPdefinition. Will your own customer record dataquality enable you to do this? Does it match yourrisk appetite? Is extending regulation to coverdomestic PEPs a natural next step, given the increas-ing awareness of the damage caused by corruption…if so, perhaps you might as well start now?

This is a good example of the need to recognize thetrade-off between Risk and Resources.

.............................................................................................. ..............................................................................................Excluding Domestic PEPs Focus on Senior PEPs


Commercial watch list vendors keep the dead and thedefunct in their databases in the interests of compre-hensiveness and historical audit trail. And the processof laundering ill-gotten gains can extend beyond termof office or even, in the case of relatives and close as-sociates, beyond death.

As the years go by it will be increasingly important foryou to define when a PEP stops being a PEP in orderto avoid checking against persons that no longer rep-resent a risk and will solely generate false positivematches. The EU has said officially that institutionsmay, on a risk-sensitive basis, stop treating a personas a PEP from one year after they cease to hold therelevant office.

You should apply risk-based filtering and prioritisationpolicies as to the distance in time from being an ac-tive PEP that you continue to treat a PEP, (and a PEP’srelatives or associates), as a PEP. You could, for ex-ample, select a period of one year for low risk job rolesfrom low risk countries e.g. military officials fromNordic countries, a five year span for higher risk rolessuch as City Mayors, and at least a lifetime for Headsof State and their relatives and close associates.

This processwill significantly decrease the number ofPEPs you are checking against and therefore thenumber of hits your staff will have to remediate.

By including these lists, commercial watch listvendors perform the service of providing acomprehensive risk management service. Howeversome of these individual lists contain tens of thou-sands of entries of persons and entities that may notfit your risk profile. Ranking different lists by impactand probability for the purposes of filtering andprioritization will enable you to exclude low-risk listsand further reduce the potential number of falsepositives.

There are a limited number of official sanctions lists,issued (often following United Nations resolutions) bynational governments and the EuropeanUnion. Giventhat it is these that carry the legal sanctions, mostinstitutions involved in international transactions willdecide to cover all entries of individuals and entities onall official financial sanctions lists, even though thesanctions only apply within the jurisdiction or judicialreach of the issuer (notoriously, in the case of theU.S.,financial sanctions reach can be global because of theways in which they impact $ transactions and USpersons wherever located).

Commercial watch list vendors do not just providesanctions and PEP lists. They also offer, for example,local or national Most Wanted lists of criminals andpersons wanted on suspicion of grave offences;regulatory misdemeanour lists of entities andpersons fined or otherwise penalised by regulators;lists issued by international public bodies of entitiesinvolved in contractual irregularities; ‘notoriety’ lists ofpersonswho have attracted negativemedia publicity.


14

Cull ex-PEPs..............................................................................................

Select Sanctions and Other Official Lists in Line With Risk.............................................................................................................................................................................................


As discussed earlier in this paper, politicians couldonly have developed the sanctions and PEP regimesin the belief that the matching of names ismechanistically easy and that matching a name isthe same as matching a person. Experience hasshown how naïve this is.

Take the spelling problem. Names do not have asingle, authoritative spelling.

Most sanctions and watch lists are in roman scriptand use transliterated names of Arabic, Chinese orother names with a native non-roman spelling.Different but similar names can be given the sametransliterated equivalent. Even if the name is nottransliterated, in many cultures names do not haveunique, authoritative spellings. (The given name‘Muhammad’ was the second most common in theU.K. in 2007 if all fourteen different spelling variationsused are taken into account.)

Nor are names always available in the same form.Names on watch lists may be available as full names(all family and given names) but are often available inanypermutation of family name, given nameand initial.

Data in many entries in sanctions lists are notoriouslylimited. Lists are based on open sources, not just forpractical reasons but tominimize the risks of publish-ing false information. For obvious reasons, governmentsdo not routinely have full names, addresses, datesand places of birth etc for wanted terrorists andcriminals. Perhaps more surprisingly, even membersof government do not routinely put personal informa-tion into the public domain, even over a long career.Less surprisingly, personal information about othercategories of PEP is even more limited.

Nevertheless, commercial watch list vendors do theirbest to maximize the data associated with a name.The more complete the data, the easier it is for insti-tutions to avoid false positives.

You can therefore do a lot to help yourself by:

• Data cleansing - for example, by eliminating dupli-cates across your databases, a notorious issue formulti-product, multi-company financial servicesgroups.

• Obtaining and using additional date fields – espe-cially date or year of birth, but also country ofnationality or residency, gender, place of birth. Thiscan be used in conjunction with the closeness ofmatch option.

• Using, where relevant, original non-roman scriptsand original spellings of names.

Name-matching tools enable institutions to choosethe closeness of match that constitutes a hit,supported by a proprietary algorithm to measure thiscloseness. A 100% match is an exact match of thename (as transliterated) recorded in the watch list. A90%match is a match on the record in the watch listplus some degree of tolerance of variations in spellingor information (e.g. availability of a middle initial).

The higher the percentage match, the fewer hits willbe generated and the greater the risk that theinstitution will miss a nearmatch that is a truematchrather than a false positive.

For the purposes of filtering and prioritisation youshould use a percentage match that reflects the riskbeingscreened for inaccordancewithyour riskappetite.


15

Use a Risk-based Name Matching Tolerance............................................................................................................................................................................................. ..............................................................................................

Apply High Data Standards


As noted in the first part of this white paper,financial targeting by the authorities today remainscrude – financial sanctions are based on whollyinadequate data, and PEP regulation will alwaysremain ambiguous in scope.

In response, screening is evolving – fast.

Smart institutions are takingmatters into their ownhands and leveraging powerful new technologyand data sources such as from Dow Jones toscreen their risk more effectively.

One-size no longer fits all and firms utilising a risk-based approach are, step by step, winning thebattle to have an effective programme at anacceptable cost.


16

.........................................................................................................................................................................................................................................................................................................Conclusion


For Further Information

Website:www.solutions.dowjones.com/watchlist

Email:

[email protected]


17

About Dow JonesWatchlist

Used by eight of the ten largest, global financial insti-tutions, Dow JonesWatchlist is statistically proven tobe themost accurate, complete, and up-to-date list ofsenior PEPs, their relatives and close associates.

Additional comprehensive coverage of national andinternational sanction lists, andpersonsconvictedof, orlinked to, high-profile crime, allows our customers tominimize the risk of taking on the wrong customer andcomplyeffectivelywithanti-money laundering regulation.

About Dow Jones

Dow Jones & Company is a subsidiary of NewsCorporation (NYSE:NWS,NWS.A;ASX:NWS,NWSLV;www.newscorp.com). Dow Jones is a leadingprovider of global business news and informationservices. Its Consumer Media Group publishes TheWall Street Journal, Barron’s, MarketWatch and theFar Eastern Economic Review. Its Enterprise MediaGroup includes Dow Jones Newswires, Factiva, DowJones Client Solutions, Dow Jones Indexes and DowJones Financial Information Services. Its Local MediaGroup operates community-based informationfranchises. Dow Jones owns 50% of SmartMoneyand 33% of Stoxx Ltd. and provides news content toradio stations in the U.S. Since 1882, the Dow Jonesname has been synonymous with accuracy, integrityand trust.

http://www.newscorp.com

mailto:[email protected]

http://www.solutions.dowjones.com/watchlist

Documents

Dow Jones Watchlist White Paper