Reputational Risk Begins with Trust Erosion – A Closer Look

Reputational damage mostly accumulates unnoticed before the public witnesses the repercussions, and it takes years to build a reputation, but it will be destroyed by carelessness in a few minutes.

“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.” 

 Warren Buffett

At Warren Buffett’s suggestion, what can we do to avoid these reputational risks? Initially, companies must be vigilant about linking with new partners or creating client bonds.

Connecting with entities that are tied to some criminal activity, whether intentionally or negligently, carries an immense reputational risk. When such a partnership is discovered, no one can stop the negative publicity.

The failure to adhere to the AML regulations or unintentionally conducting money laundering related transactions can result in severe penalties. However, beyond legal repercussions, reputational fallout often overshadows.

For instance, serving clients involved in heinous crimes such as terrorism or sexual abuse can even lead to reputational damage.

Once the news breaks, reputational risk management isn’t solely about damage control; being attuned to the subtle indicators is the main task that shows how trust is fading with time. In the financial era of compliance, erosion mostly occurs quite a while before regulatory action is taken.

“Risk emerges long before Regulators step in.”

When the regulatory authorities start to intervene, the damage has already been inflicted upon the company; now there is no way back. This will only end up in raising public scrutiny, loss of customers, and lower revenue.

These signs actually erode trust long before a company comes into the penalty phase.

Did You Know?

63% of a company’s market value is determined by its reputation

What is Reputational Risk?

Here’s a quick reputational risk definition: A reputational risk is heightened when illicit actions, events, and circumstances start to damage a firm’s credibility and confidence among its stakeholders.

This disruption of trust is mainly caused by the negative publicity, regardless of its accuracy, highlighting the fact that perception can be more influential than the reality itself.

When it comes to reputational damage in the context of compliance with anti-money laundering regulations, it alludes to the gradual erosion of trust when an institution’s preventive measures against financial crimes are compromised.

It is often mistakenly seen as an outcome after a regulatory fine or public incident. In fact, reputational damage often initiates even before the public becomes aware of it through:

• Subtle internal warnings
• Withdrawal of external support networks
• Stakeholder distancing

Traditional Ties of Reputational Risk With Publicly Damaging Events

Traditionally, reputational risks were tied to enforcement actions, headline scandals, or huge penalties. People often mistake visible manifestations as the original damage.

However, the real damage mostly occurs before regulatory action is taken.  Reputational risk assessment actually works to identify these predominant signs before they get heightened and become a part of a crisis.

After getting the signs of weak AML controls, clients, shareholders, and regulatory authorities start losing their faith, even before a formal action is taken. Reputational damage mostly starts in the shadows, visible only to the insiders.

Among well-known reputational risk examples is Deutsche Bank, which facilitated $10 billion in sham trades that might have laundered money out of Russia.

This illegal act resulted in a huge penalty of $630 million. However, the bank’s reputation had already suffered due to prior compliance failures and weak internal controls.

Reputational Risk Due to Excessive De-Risking

Banks can face reputational risk not only when they facilitate high-risk clients suspected of laundering money.

In fact, they also face a loss of reputation for unnecessary de-risking, which implies offboarding clients or terminating relationships with apparently high-risk clients.

This can happen because a client may be from a high-risk sector, such as a Non-Profit Organization, or from a high-risk jurisdiction, or the client could be a politically exposed person. But it doesn’t mean that the client is high-risk or involved in money laundering.

In such cases, reputational damage due to de-risking can be assessed by identifying the right risk through advanced adverse media monitoring.

Types of Reputational Risk

Reputational risks can have both internal and external vectors:

• Internal Trust Erosion

Internal trust erosion happens when the organization’s watchdogs, such as the boards, compliance teams, and risk committees, witness the warning signs being ignored, and they ultimately start to lose their faith in the systems.

• External Distancing

External distancing can be a significant factor that activates the correspondent banks, investors, and regulators against your company. This can result in less business, investors pulling out their money, and regulators implementing more scrutiny and stricter laws.

WestPac’s External and Internal Erosion

In the WestPac’s case, allegations of 23 million AML Breaches by AUSTRAC in 2019 triggered a review in 2020. This review highlighted the underlying cultural deficiencies and a weak internal risk management system.

These system failings not only resulted in operational weaknesses but also in reputational damage both internally and externally.

• The inside impact of this review exposed constant problems in the risk management frameworks, leading to internal distrust and requiring a cultural “reset”.
• The outside impact was reputational damage that the bank suffered, which prompted different executive resignations along with an escalation in regulatory oversight.

Reputational Risk Assessment Trends and Regulatory Shifts in 2025

Early 2025 has seen vast regulatory shifts in the financial sectors regarding reputational risk management; some of the major ones are mentioned below:

• The use of AI for reputation management and early crisis detection offers diverse benefits to organizations. However, this approach comes with risks, such as bias in algorithms.
• With the fragmented media, businesses must engage publicly and respond to issues rapidly, which is essential for companies. A foundation of strong ethics, honest communication, and data security is vital to maintaining a positive image.

Reputational Risk is Measurable! But It Requires Attention

Are you staying back and waiting for a fine to approach you by missing the early indications?

Take control of your reputation today by identifying reputational risks early, before they become regulatory failures!

At AML Watcher, we view reputational signals as a crucial indicator in assessing control effectiveness. Risk appeared not only in the form of overdue alerts and SAR volumes but also in the stakeholders who lose their faith in you.

We empower the compliance officers with adverse media monitoring, which enables accurate due diligence of customers, client entities, and potential partners. Our dynamic threat intelligence helps detect and flag suspicious activity early, ensuring continuous oversight and proactive risk mitigation.

With personalized alerting and a built-in audit trail feature, AML Watcher strengthens both regulatory alignment and operational resilience

So what are you waiting for? Visit our website and book a Free Demo!