The most unforgiving mistake in your business, if dealing globally, is to overlook the customer of your customer and the supplier of your supplier. It’s unlikely to be surprising when a well-known financial organization, Standard Chartered Bank was heavily fined for being unable to meet the (MLRs) Money Laundering Regulations 2007 as a result of their failed sanction list screening and AML regulatory program. The deficiency in SCB’s sanctions checklist screening system facilitated the transactions of customers from sanctioned entities, resulting in the second largest fine of £102.2 million imposed by the Financial Conduct Authority (FCA).
Equipping you with an idea of how robust sanction list screening software is crucial for your institution or business, this blog will highlight the evolution of sanctioned list checks and overcome the potential challenges.
Sanctions Screening: A Brief Overview
A screening control opted for by financial institutions (FIs) to combat sanctions risk through a rigorous detection and prevention methodology is known as sanction screening. In adherence to (FCC) Financial Crime Compliance program, this screening allows institutions to avoid doing business with organizations and individuals identified in the global sanction lists. It enables them to take imperative risk mitigation measures and prevent hefty fines, creating an alarm for the entities mentioned in the autonomous sanctions list by their respective regulatory body.
Ideally, FIs identify their sanctioned targets through a critically designed control, including both transaction and customer screening, addressed in the Wolsferg guidance on sanctions screening. The customer screening involves an identification of flagged individuals and their journey with the institution while the transactions with the flagged or potential entity are checked through transaction screening. A controlled combination of both screenings helps FIs to accomplish their sanctions regulatory goals.
Why is Robust Sanction Screening an Unavoidable Measure?
As a measure to establish peace and global security and fight financial and humanitarian crimes including money laundering, terrorist financing, drugs, and human trafficking, global sanctions are imposed by authorities such as the United Nations (UN), the European Union (EU), and the Organisation for Security and Cooperation in Europe (OSCE), stated by Ministerio De Asuntos Exteriores, Union Europea Y Coopercian. Having an integrated sanction list screening allows FIs to find a feather in the hurricane because failing to sanction compliance can cost them millions of dollars and legal penalties.
As reported by the Manhattan District Attorney’s Office, as a result of US sanctions violations, total settlements of more than $14 billion were paid by eleven banks involving Societe Generale ($162.8 million), Credit Agricole Corporate and Investment Bank ($312 million), and Commerzbank $342 million. In 2010, the Royal Bank of Scotland Group failed to implement a reliable sanctions checklist screening, resulting in a £5.6 million fine by the FCA. It’s not just about putting a bandage on asset bleeding but to secure the integrity and reputation of any financial organization which is made possible through the implementation of an automated sanctions list screening system. Organizations with active and robust sanctioned list checks tend to have minimal to no money laundering exposure risks, financial frauds, legal penalties, and terror financing risks.
Common Loopholes: Ineffective Screening
The history of infamous financial institutions being fined millions of dollars can make one wonder what could be the failure of their screening systems, a justified question indeed. According to the Anti Money Laundering Council, the general and mostly occurring failures in the sanction list screening software are as described below.
- Inefficient testing metrics not meeting the global benchmark
- Inability of the screening systems getting dodged by manipulation of covered persons in hiding or altering their original data.
- Failure to include official mandated sanctions lists in the system’s configuration.
- Limited automation in the manual screening systems and processes.
- Efficiency parameters such as returns per hit are relatively higher than global standards, causing higher false positives.
- The screening systems are tuned on the resource capacity instead of risk altitude, resulting in an overall poorly configured system.
- Inability of systems to incorporate updated data and sanctions lists leads to poor data management.
Fraud Proof Screening: Alarming Gaps Need Evolved Solutions
According to the Wolfsberg guidance on sanctions screening, published in 2019, ideally, it is not possible for a screening system to prevent or mitigate all the sanctions risks. The effectiveness of screening varies with varying factors such as sanctions risks, characteristics of available data (type, quality, and extensiveness), as well as the customers and services of FIs. However, institutions can achieve appropriate screening results with the implementation of extensive and integrated sanctions list check systems, consisting of below-core technical advancements.
- The AML/CFT-based systems with configured black box technology or fuzzy logic act against algorithmic manipulation of flagged individual identification.
- Regularly maintained and calibrated screening systems with enhanced efficiency and manageable false positives.
- Replacement of manual screening in highly exposed systems with automated screening. Such systems are embedded with delta screening, which automatically incorporates changes in both sanctions watchlist and the user account, eliminating the need to run screening on all customers but runs a check on sanctioned names only.
- Without compromising the effectiveness of screening while reducing the rate of false positives, the tuned screening systems are completely in compliance with the risk-based screening approach of FIs, an effective measure to preserve resources and time.
- AI/ML driven sanctions list screening with automated lists and data management and multilingual research capabilities enables FIs to fetch updated sanctions listings.
Every crime can be combated with balanced measures of human practices and advanced tools. There is never such a thing as “one grain for all birds”, similarly, the fight against financial crimes and business threats needs a blend of countermeasures. Whether you are a business owner or a finance crime fighter, protecting your institution is as crucial as your home.
Have a wonderful day!