How to Solve the Challenges of Sanction Screening
For financial institutions, the sanctions landscape is a minefield. It is not enough to be aware of the risks and dangers associated with violating sanctions regulations. It's a one-sided game. As a result, using sanction screening solutions is now more important than ever.
Screening against sanctions watchlists can often feel opaque for financial institutions, with high-stakes penalties attached. In 2020, regulators fined global banks more than $14 billion for a variety of violations, including sanctions compliance and anti-money laundering (AML) controls. Over $11 billion in fines were levied against US financial institutions alone, accounting for nearly three-quarters of all fines issued.
Challenge #1: The sanctions landscape is continuously in flux
Sanctions are frequently used as a foreign policy tool by governments and political entities against a wide range of targets, including individuals, businesses, organizations, financial institutions, and government agencies. Sanctions are constantly imposed and lifted, so sanctions watchlists are frequently updated. Shifting political developments (such as Brexit and the Anti-Money Laundering Act of 2018) can also result in the creation of new lists that must be reviewed, updated, and monitored.
Solution: Prepare for continuous change
A bank needs a sanctions screening solution that includes watchlist management (WLM) functionality that updates relevant data automatically rather than requiring manual updates by human personnel. Compliance is maintained through automation in an environment where sanctions lists are constantly changing. Operations and control functions can ensure that they are prepared to absorb change and pivot as needed.
Challenge #2: Sanctions screening is complicated
Keeping track of individuals, businesses, and entities on sanctions lists is only one aspect of the sanctions screening process. Monitoring adjacent actors who are linked to those on the list adds another level of complication. As new payment methods, such as cryptocurrency, become more popular, you'll need to stay informed about how these funds are used.
Solution: Close the gap between regulatory expectations and operational realities.
Maintaining compliance with regulatory expectations will help your organization avoid violating any sanctions rules. This includes ensuring that your service level agreements (SLAs) do not jeopardize your regulatory obligations. Maintaining open lines of communication with regulators will also assist you in understanding their expectations and anticipating regulatory changes. Proactive dialogue keeps your understanding of sanctions-related obligations current and provides insight into how the landscape may be shifting.
Challenge #3: Ensure you do not facilitate sanctioned activities
You must conduct risk assessments on a regular basis to ensure that your organization is not unwittingly facilitating or assisting any sanctioned activities. Your sanctions screening solution should be used as a preventative measure to avoid dealing with sanctioned parties. Some activities may not necessitate the application of sanctions. However, if your risk assessment identifies it as a vulnerability, implementing basic controls will strengthen your risk management strategy.
Solution: Find a balance between business and controls
In the sanctions minefield, chasing dollars blindly can have far-reaching consequences if your company is found to have assisted a sanctioned entity, individual, or PEP. By understanding all of the relevant players, performing regular risk assessments can act as a guardrail to help your organization remain compliant. Examine the products in your inventory and the activities of your organization to ensure proper control of your operations. Recognize how your products or new features can be used to assist sanctioned entities or facilitate illegal activities.
Challenge #4: The rules are frequently unclear, but the consequences can be severe.
Conflicting communications only complicate the sanctions screening process. If your company is based in the United States and has operations in a potentially high-risk jurisdiction, US regulators may notify you that you are not permitted to do business with certain sanctioned entities in that jurisdiction. And that jurisdiction may have its own regulators who take a different stance. While the rules are difficult to understand, the consequences can be severe. Not just because of the possible fines. Remember that regulations are in place to stop illegal activities and keep real criminals and terrorist groups from causing harm to real people. If your organization is found to be facilitating illegal arms deals, terrorist financing, laundering money for criminals, or assisting a human trafficking ring, you will face severe penalties.
Solution: Serve multiple, sometimes conflicting regulators
The best way to mitigate the risk of sanctions compliance is to embrace solutions that fully understand the confusing and chaotic sanctions landscape. Sanctions screening systems can be used to understand existing sanctions, review numerous watchlists, and outline how existing sanctions impact your operations. Technology has the power to make sanctions screening more efficient, transparent, and thorough to protect your organization.