Customer due diligence (CDD) is a fundamental process for a financial institution to assess how much risk of financial crime it faces. But FIs often have thousands of customers, and monitoring them all simultaneously can be a difficult task. This is especially true when some clients’ credentials and activities repeatedly appear suspicious when they really aren’t.
Investigating false positives wastes a lot of time and money for financial institutions. So FIs sometimes exempt specific customers from regular due diligence if they have long histories of non-suspicious activity, or of appearing in false positives. These customers are put on exclusions lists—this article will explain what those are and why they’re used.
What is an Exclusions List?
An exclusions list is a list—set up by a financial institution—of customers who are to be exempted from ongoing due diligence screening. This is usually because these customers’ activities have a history of being flagged as false positives, or of otherwise not exhibiting anything suspicious.
How are Exclusions Lists Used for Anti-Money Laundering (AML)?
The main reason FIs use exclusion lists for AML is to reduce their false positive rates. These are instances where legitimate customers and their activities are incorrectly identified as threats. While it’s fortunate these situations don’t constitute actual dangers to the FI, time spent investigating false positives can eventually add up. This can leave FI compliance teams with inadequate time for priority tasks such as handling true positives (i.e. malicious financial actors and activity) and filing regulatory reports.
To curb this problem, FIs will sometimes add certain clients to exclusions lists if those clients’ credentials and activities are unlikely to be suspicious. This can be determined by analyzing a client’s historical behavior patterns—especially if their credentials and activities have repeatedly come up as false positives.
By putting clients on exclusions lists, FIs exempt them from ongoing transaction monitoring and other due diligence processes (such as screening against sanctions lists). While this can certainly reduce false positives, it can also be a dangerous compliance practice if done carelessly.
Entities on exclusions lists should still be screened periodically for any changes in their financial activity patterns and overall risk profiles (such as becoming a politically exposed person). If something appears suspicious or overly risky, it can be prudent to take the client off the exclusions list and resume regular monitoring.
Balance Exclusions Lists with Regtech Tools from Unit21
An exclusions list is a way to minimize the risk of certain customers showing up again and again as false positives in an AML screening system. But it can present new risks in that subjecting those clients to less scrutiny may mean missing illegitimate transactions—either deliberately initiated by the client, or as the result of activities like identity theft or account takeover.
Having the right Regtech tools, like Unit21’s Transaction Monitoring and Case Management solutions, can reduce the need for exclusions lists by more accurately identifying suspicious activities and managing client accounts that are causing difficulties for compliance.
To get a hands-on look at how these features work, contact us for a demo.