As the legal requirements for combatting money laundering and terrorist financing continue to increase, financial institutions are facing mounting compliance challenges. The number of global watch lists and sanctioned activities is on the rise, and watch list data can change daily. Financial institutions are under pressure to address this growing complexity, while also keeping compliance costs in check, efficiently managing transactions and delivering superior customer service.
Many banks are failing to meet their legal obligations as evidenced by the growing number of fines imposed in recent years for anti-money laundering (AML) violations. Banks have been charged millions and even billions of dollars for failing to prevent illegal transactions, suffering huge hits to their net value and reputation.
This blog is the first in a two-part series on the modern challenges of sanctions compliance. In this blog, I’ll provide insight into some of the key challenges and, in my second blog, share an effective approach for addressing them.
Some of the leading challenges financial institutions face in implementing and running effective sanctions compliance programs include the following.
- Globalization: Organizations are exposed to greater sanctions risks today due to the rapid pace of globalization.
- Global watch lists: The number of individuals and entities on global watch lists continues to grow at a phenomenal rate.
- Sectoral sanctions: Sectoral sanctions, such as those targeting Russia’s financial and energy sectors and prohibiting certain types of transactions, complicate the task of distinguishing between approved and non-approved transactions.
- Politically Exposed Persons (PEPs): When screening for Politically Exposed Persons (PEPs), financial institutions are faced with subjective decisions in terms of who constitutes a PEP and whether domestic, as well as foreign PEPs, should be flagged.
- Third-party screening: AML regulations require companies to screen not just their customers, but also related third parties, such as suppliers and the entities with whom their customers are sending or receiving funds. Enhanced due diligence is required, depending on the perceived risk of the third party.
All of the above challenges must be addressed in the context of exploding volumes of global transactions, particularly where terrorists and criminals are constantly changing their tactics and identities to avoid detection. In short, the data haystack is getting larger, while the needles are increasing in number but are getting more difficult to find.
Sanctions compliance—the task of finding the needles—imposes a variety of costs on financial institutions. Organizations must invest in sophisticated technology that can automatically screen large volumes of transaction data and accurately identify watch-list violators. This is no easy task, given that individuals and entities are often identified (and misidentified) in a multitude of languages, spellings and formats, each unique to the database or payment instruction where the information resides. Another cost is for the personnel who operate the technology and evaluate flagged transactions to determine whether to approve them.
At the same time, the evaluation process can be slow and even disrupt legitimate transactions, causing customer dissatisfaction and loss of business. Organizations can speed up decision-making by increasing the resources devoted to resolving watch-list alerts, but this is a cost few companies can afford. Some companies have sought to keep transactions and revenue flowing by easing their screening controls at times of operational stress, but this approach has led to severe fines and penalties for non-compliance.
How can financial institutions meet the growing challenges of sanctions compliance without incurring inordinate costs or disrupting customer service? In my next blog, I’ll share a unique approach that focuses on integrating people, processes and technologies and is aimed at continuous improvement in the face of changing demands. The type of compliance program we’ll discuss can protect financial institutions not only from the substantial risks of non-compliance, but also alleviate the burden of compliance and drive strategic competitive advantage.
In the meantime, read CGI’s white paper on this subject, or feel free to contact me for further discussion.