Adverse news on due diligence

In due diligence processes, once we have verified the identity of our clients, we must gather information about the purpose and nature of the business relationship, as well as additional documentation. This is where the search for adverse news comes into play.

General considerations

Before addressing the concept of adverse news, it is important to note that obligated entities must obtain additional documentation or information from reliable and independent sources during the client identification process when higher-than-average risks are detected.

Generally, this obligation is fulfilled by requesting additional documentation from the client in question or conducting an analytical search in reliable sources. As a result, the information provided by the client must be supplemented with additional documentation or information from reliable, independent sources, which can include a search for adverse news.

What is adverse news?

Adverse news (or adverse media in English) refers to all negative or harmful information found in various reliable sources. Adverse news may reveal a client’s or organization’s involvement in money laundering, drug trafficking, terrorism financing, scams, fraud, etc.

Sources of adverse news information may come from:

• national governments or supranational entities;
• supervisory bodies;
• Financial Intelligence Units;
• traditional media outlets or blogs.

What does the regulator say?

The European Banking Authority, the European Securities and Markets Authority, and the European Insurance and Occupational Pensions Authority, back in 2018, stated that obligated entities must consider the existence or absence of adverse news when determining the risk level associated with a client or transaction. They also noted that searching for adverse news enhances the information gathered in the due diligence process, thereby improving related due diligence procedures.

Additionally, the Financial Action Task Force (FATF), in its Risk-Based Approach Guidance, highlighted the importance of “conducting additional searches to support the individual client risk assessment,” using adverse news searches as an example.

Conclusion

Adverse news, as long as it comes from reliable and independent sources, is a type of highly significant information when it comes to properly assessing the risk of our clients. All obligated entities should include it in their due diligence toolkit. Moreover, due to its nature, it is a highly dynamic type of information, requiring continuous attention from the obligated entity, either directly or through delegation.