How to do effective customer screening?

Did you know that customer screening is just as important as employee screening for many industries? Over the years, if you look into the anti-money laundering (AML) failures, these were due to a lack of customer screening during the customer lifecycle or onboarding stages. In fact, the higher the customer risk, the more difficult the screening and significant the reputational damage could be.

When customer screening is not done right, you might end up having customers with highly-toxic behaviors, including drug trafficking, sanctions breaches, and other forms of crimes. And even though the KYC screening process is not the be-all and end all for such situations, it is a great step to make sure that your business does not facilitate criminal activity.

This article will help you understand more about how to get your new customer screening done properly.

Customer Screening 

The main aim of the customer screening process is to add to the overall risk picture of your customers and to determine if they are:

  • Convicted or suspected criminals
  • Politically exposed persons 
  • Subjected to international sanctions

The main idea is to determine if the customer could be or are linked to any terrorist financing, bribery, corruption, money laundering, or any other kind of financial crime. In case they are, you will need to protect your firm by declining to do business with them or take a follow-up action by filing a suspicious activity report.

Although this process may seem obvious, a lot of businesses fail to see that customer screening is effective if it is risk-based. This means that it has to be responsive to risk throughout the screening process where they analyze and seek to understand how any terrorist and money laundering risks you find can affect your business and act accordingly. In this approach, the customers considered high risk are then allocated to further investigation, more regular review, and so on.

Why does customer screening matter?

One of the main reasons is breaching sanctions. This means that if you do business with a sanctioned entity or individual, it is considered a criminal offense in almost all jurisdictions. There are a lot of harsh penalties that are applied by the court on businesses that fail to screen their customers or fail to risk rate them properly. In short, it is very important to take precautions to prevent sanction breaches.

In fact, in 2014, the New York Department of Financial Services fined Standard Chartered Bank $300m after the bank was found to facilitate breaches of US sanctions against Iran. Another penalty was imposed on the bank when they failed to detect potentially high-risk transactions for further review even though there were no criminal activities connected to it. It just shows how important it is to get the customer screening process done.

From fraudsters targeting vulnerable people to violent drug traffickers, the ability to move illicit money without being caught through your business means that your company is enabling such criminal activity. Breaching financial sanctions also has a huge impact on international politics. So customer screening is a very important step to make sure your business isn’t becoming a conduit for criminal money.

Which businesses need to screen their customers?

The kinds of businesses that are legally required to screen their customers vary between jurisdictions. In every country, there is an AML regulated sector, and the companies that fall under this have to screen their customers as per the KYC (Know Your Client) obligations. The types of businesses include:

  • Company and trust administration businesses
  • Money services businesses
  • Investment businesses
  • Credit and bank institutions
  • Gaming businesses
  • Dealers in high-value goods
  • Real estate agents
  • Accountants
  • Lawyers
In case you are not sure if your business is regulated for AML purposes, get in contact with your industry body or trade association. Startuprbooks can guide with more information if needed. Just so you know, a lot of companies that do not fall in the AML regulated sector get their customer screening done by another party to help protect against potential reputational damage. Hence, it is always a good idea to get the “know your customer screening” done.

Requirements of an Effective Customer Screening

For effective customer screening, the company needs accurate data preparation, comprehensive investigation, sophisticated matching, auditing, and reporting processes. Here are some of the key requirements for effective watchlist screening:

  • Identifying the highest risks: Companies that have millions of customers have to prioritize their review activity against the ones that are the greatest threat.
  • Auditing and preparing source data before the customer screening: Due to the high levels of inconsistencies and inaccuracies that persist in both watchlist sources and customer data, preparing accurate data is very important for customer screening.
  • Accurate screening against a wide variety of risk sources: The sources here need to include the lists of PEPs, prohibitions, sanctions, and special interest persons. It should also have blacklists along with the lists of other internally sanctioned entities and individuals. 
  • Orderly screening of the whole company: This customer screening takes place at intervals appropriate to the risks faced by the business and also when a new relationship is started with entities and individuals. 
  • Combining information from several resources: Some companies have all their data in one place. But some store the data in different file types and formats. It is important to have an effective client screening system to connect all the different sources and types of data from these systems together. 
  • Eliminating false positives: A lot of systems create many false positives which waste the time of the team. It is important to have more accuracy in the first generated data by the screening system to get the genuine risk entities or individuals identified. 

Common Mistakes to Avoid 

Here are some of the common mistakes that should be avoided when you get new customer screening performed:

“We know our customers”

Companies usually grow a false sense of security about the risk profile of a specific group of customers. The reason can be because they have a good and long professional relationship with them, have met the person in question, or because they are in the same jurisdiction. This is a bad attitude of “we know our customers” where companies usually end up vouching for the people they know, and can lead to red flags being overlooked. It is important to know that customer risk can change over time. This makes it crucial to get the customer screening process done regularly before it’s too late.

Lack of relevant staff information

A lot of frontline staff do not have a proper understanding of the methods the company can get abused by criminals. Company staff usually report that they do not feel confident to analyze the activity and rationale of the customer. That is why it is vital to develop staff understanding of the money laundering risks the company can face. With profile monitoring, risk-based transactions, and initial screening, it has to be the core element of your financial crime prevention strategy.

An effective “know your customer” (KYC) needs to be a lot more than just checking that the customer has a criminal record or not. Obviously, it is not possible to know the customer completely, but it is critical to understand what are the wrong kinds of customers. And the staff needs to understand this.

Evidencing your work

With most regulatory regimes, every business has to have good records of their compliance-related work. This means that you will have to document all the customer screening you carry out along with the basis of the decision, and include the minutes of the relevant meetings. It is also recommended to store all the data on a system as paper tends to get misplaced.

Recognizing the limitations of screening

The customer screening process is crucial for protecting a business from financial crimes, but it is just the first step. In fact, people who are hoping to misuse financial services know that they would not pass the screening process if they have a criminal record. So, they make sure it is all clear and once they pass the process successfully, things end up changing for them. In short, instead of focusing all on just the initial customer screening process, you need to keep regular screening as well

Dangers of over-screening

KYC in many businesses is performed by a junior staff in the company who may not know how to get the best results, and not by a compliance professional. In fact, over-screening is also very cost-ineffective. It would take the staff a lot of time to interpret the results for each customer and drain all the staff resources. Along with this, another common consequence of overzealous screening solutions is false positives.

Unlike in the past, you can no longer cross your fingers and hope to end up with the right type of customer. In case your company is abused by criminals and there is an investigation, you will need to have all the documents to show that you had performed a proper KYC procedure. And these procedures are expensive and time-consuming, but you can avoid them by taking a risk-based approach when customer screening is done.

How to do your customer screening?

It is vital to screen against PEP lists, government blacklists, watch lists, and sanction lists as a minimum. And the best way to check the data is by using the common database available for the source data. Here are some of the ones that we use:

  • BUREAU OF INDUSTRY AND SECURITY (US)
  • EU FINANCIAL SANCTIONS
  • UNITED NATIONS SANCTIONS (UN)
  • AUSTRALIAN SANCTIONS 
  • DEBARRED LIST (US)
This list is one of the most important databases that we use to source data along with the many other databases for our customer screening process. In addition to this, we utilize Artificial Intelligence to monitor and update our database on a daily basis. In case you feel that there is a database missing, let us know and we would be happy to add them as well.

When should I start my screening process?

The answer to this is based on how strong you want the compliance program to be. There are usually two approaches:

  • Manual new customer screening during on-boarding and regularly afterwards.
  • Manual customer screening during on-boarding and periodically after that, AND an automatic overnight batch screening of all customers

From the two approaches above, the second one is better as it leaves less to chance, and recognizes that events impacting customer risk can occur very rapidly. Basically, the faster a business is alert about any risk, the better off it would be.

Taking results 

Here is how you can interpret the results from the customer screening process:

  • Confirm that the results are related to your customer. To do this, cross-check the country of origin, passport number, date of birth, and other details.
  • In case you have a match on a name, but it is not identical, check the other details to see if it is actually your customer or not. 
  • Watch lists, sanctions, and PEPs are obtained from databases compiled by professional and qualified authorities about the people who pose a risk. Media searches take the data from the web so when analyzing these results, consider the provenance of each result. Ensure that it comes from a well-regarded and widely-read news organization. Although small blogs do not always have misguided information, it is better to be sure about the data obtained. 
  • With results that say, ‘this person is involved in bribery’, it is easy to interpret this. But there are other results that may not be so easy. The staff in charge needs to know about this or have the customer screening done by professionals to avoid all the trouble. 

How can we help you?

Startuprbooks offers professional customer screening services allowing you to reduce the time and cost of your company’s screening process. Our team of experts uses the latest technologies to get you the best reports. In fact, we have a dedicated team to source and verify all the data obtained in the customer screening process. So, if you are in need of screening services, we can help your business screen customers and greatly reduce your risk in the long run. Contact us to know more!