Solving the Sanctions Screening Puzzle Bit by Bit

Tom Berkovitch, Director of Product Management & Strategy, Financial Crime Portfolio | May 25, 2022

Sanctions screening has long been a multi-dimensional puzzle that’s constantly evolving and increasing in complexity.Moreover, due to the severe financial and reputational ramifications of any potential violations and heightened regulatory expectations, getting sanctions screening and compliance right is a major obligation for banks and financial institutions (FIs). As a result, there is a multitude of challenges associated with the implementation of a successful sanctions compliance program.

Sanctions have often been part of the essential foreign diplomacy – as a geopolitical tool or a deterrence policy. Therefore, changes in sanctions are mostly imminent in response to any foreign policy changes by major economies. Many times, these sanctions change almost overnight. As a result, organizations must be nimble and agile to adapt to these changes. Banks and FIs must essentially comply with multiple global data sources of watchlists, sanction lists, designated lists for Specially Designated Nationals (SDNs) or the Politically Exposed Persons (PEPs), adverse media, and internal lists, or “accept lists.” Additionally, they must stay abreast of changes to any of these sources. It is a humongous task, making it difficult for firms to keep pace and remain compliant.

Operational challenges can also mar the effectiveness of a sanctions program. For example, there has been an exponential increase in remote financial activity and online transactions. Ensuring robust and foolproof screening of customers, their associates, adjacent actors, transactions, and their beneficial owners during the entire customer lifecycle is an arduous task that is further complicated by the ever-evolving sanctions landscape. Another hurdle is the legacy systems that induce data inconsistencies, pose matching and screening irregularities, cause inflated false positives, and result in tedious and ineffective investigations. So, while sanctions are undoubtedly a key focus area for banks and FIs, the million dollar question is: where to begin?

Deciphering the challenges

Getting sanctions screening right is a key priority for banks and FIs for a foolproof AML/CFT compliance program. However, they often face roadblocks when achieving effective and robust sanctions screening and controls. Let us look at some of these challenges:

  • An exponential increase in transactions: On one hand, globalization and shrinking geographic constraints increased the global and cross-border transactional volumes, while on the other hand, evolving customer expectations forced banks and FIs to advance their modus operandi towards a new normal of digital products and services. Result—the financial services sector witnessed an exponential increase in transactions. Come 2020, the pandemic only added to this digital activity, and transactions surged further. However, with remote access, online customer onboarding, and legacy technology, banks struggle to keep up with the handling and monitoring of the large volume of transactions.
  • Broadening the scope of sanctions: The sanctions landscape and scope is inherently complex. International sanction lists are published by multiple global agencies and are often updated by the issuing bodies to accommodate changes in the jurisdiction, geography, political landscape, and policies. As a result, these sanction lists are subject to interpretation and may lack structure consistency. Moreover, the sanctions universe includes the designated individuals or entities and their associates, connections, and adjacent actors, increasing the scope and complexity of screening and controls.
  • Siloed, two-pronged approach:Most FIs often have a two-pronged approach to customer screening and transaction screening. Customer screening to identify targeted individuals or entities during the customer lifecycle—onboarding and throughout an ongoing relationship, and transaction screening to monitor their activities. However, this siloed system necessitates manual adjustments, hamstrings matching accuracy, causes operational redundancies, and process inefficiencies—all the while increasing costs.
  • Operational challenges due to lack of screening and matching precision: Data inconsistencies and matching and screening inaccuracies often result in an unavoidable ordeal of high false positives. Based on matching criteria and predefined threshold, alerts must be investigated and processed accordingly once they are generated. If the screening isn’t thorough enough, the under-screening risks “false negatives” slipping through the net, i.e., the sanctioned matches may pass through unnoticed. On the contrary, over-screening can generate high “false positives” where non-sanctioned entities are flagged. Thus, a lack of matching and screening precision wastes the firm’s time, effort, and resources during the alert remediation and investigation.
  • The complexity of incorporating advanced technologies safely and responsibly into sanctions programs: Most banks and FIs today understand that leveraging technology is at the heart of a resolute fight against financial crime. They are assessing and evaluating their existing AML and sanctions programs for gaps and leveraging technologies such as advanced analytics, artificial intelligence (AI), or machine learning (ML) to improve operational efficiencies while ensuring regulatory compliance. However, incorporating AI/ ML responsibly in a domain such as sanctions that are still conservative, opaque in nature, and open to interpretation ambiguity, the transition is not as simple as it sounds. The banks and FIs must gauge thoroughly what technology to use and its eventual implications, the applicable use cases, costs assessment, and most importantly, how to assimilate the technology responsibly, without bias, and securely in the sanctions program.
  • Friction at touchpoints across the customer lifecycle: Most banks and FIs continue to be driven by customer-centricity, but ineffective screening increases friction at customer touchpoints. Banks must not only detect the sanctioned and designated entities and related transactions but also avoid disrupting the customer journey and experience of the legitimate customers.

A step-by-step approach to solving the sanctions puzzle

The high-risk pitfalls of inadequate sanctions screening and controls can be overcome if the challenges above are managed. Let us look at a step-by-step approach to getting sanctions screening right.

  • Comprehensiveness is the key: Sanctions screening is a top priority for firms during and after a risk assessment and during customer onboarding and ongoing monitoring. The solution must provide comprehensive coverage against global data sources, sanction lists, watchlists, PEPs, adverse media, enforcement records, and internal lists for effective sanctions screening. It must be capable of handling real-time and batch screening and can redefine the searches tailored to the organizational risk, exposure, and policies.
  • An integrated approach to screening: Effective screening controls must entail an integrated approach for customer screening and transaction filtering. This helps deliver a unified user interface and experience, offers shared functionalities, reduces documentation redundancies, optimizes resource allocation, and reduces the training burden for the resources.
  • Focus on screening and matching precision: Precision tuning that reflects the firm’s risk exposures and screening rules is a must-have for an effective screening solution. In addition, it should normalize data to handle inaccuracies such as typos, misspellings, nicknames, titles, prefixes, suffixes, qualifiers, concatenations, transliteration limitations, and cultural specificities for accurate detection.
  • Optimized UX/UI for streamlining investigation: While it is important to reduce false positives, it is equally important to create a UX/ UI that automates and streamlines the investigations, making the process faster, more efficient, and more productive. Creating a UX/ UI that helps achieve speedy and high-quality investigations is the key to optimizing the alert remediation and disposition process for any effective sanctions program.
  • Advanced analytics for operational efficiency and high-quality investigations: After screening customer records and transactions, all possible matches are investigated based on priority established by threat levels. Advanced analytics backed by AI, ML, and graph analytics helps improve operational efficiencies, deliver higher matching precision, lower false positives, and disposition of alerts rapidly. It also helps improve the effectiveness of investigation via queue management and prioritization.
  • Improved customer experience: While effective screening helps firms comply with sanctions and regulations, it is also pivotal in delivering a positive customer experience by minimizing hassle at various touchpoints, hence, setting the right tone for the entire lifecycle.

Achieving robust sanctions screening while optimizing the cost of compliance

Though sanctions screening is such a critical component for the success of the AML/CFT compliance programs of banks and FIs, it is still challenging to navigate the complexities of the sanctions landscape. As a result, banks require a need-gap analysis and select a scalable screening solution to offer them the desired technological edge and ensure regulatory compliance.

The best-fit solution is the one that helps them tick the following checkboxes—precise matching capabilities, mitigate redundancies, achieve operational efficiencies, screening precision across the entire lifecycle, optimize investigation time and quality, lower costs, and provide seamless customer experience—all while achieving regulatory compliance. Of course, getting it right with these checkboxes may seem utopian. Still, the right innovation and technology partner can help banks and FIs achieve robust sanctions screening while optimizing the cost of compliance.