What are Sanctions?
A sanction is a protective measure, typically enacted by governments or international organisations, to discourage criminal, illegal conduct or coerce a regime into changing its behaviour. Sanctions can be applied against a country, entity, individual, organisation, or vessel. Sanction lists are often collated by governmental agencies such as the UK's HMT and US's OFAC lists or international bodies such as the United Nations (UN) and the European Union (EU).
There is a diverse set of sanctions types such as:
- Explicit sanctions name the subject explicitly.
- Narrative or implicit sanctions don’t specifically name an individual or an entity. Instead, they are implicitly covered by narrative due to their connections to a named sanctioned entity or sector.
- Sectoral sanctions that target specific economic sectors.
What are the challenges facing Sanctions Screening?
Sanction Screening has never been as challenging as it is today due to several factors, including:
- Sanctions lists are evolving rapidly in nature (e.g. narrative sanctions) and breadth (e.g. US technology export controls).
- Increase in the complexity of restrictive and punitive sanction measures.
- Sanction Screening has to account for association risk, which may not be immediately apparent. For instance, the Patriot Act forbids US corporations from supplying 'financial assistance' to organizations accused of terrorism.
- Multiple sanctioning bodies have different standards and agendas which do not necessarily align.
According to the data company Refinitiv, as of early 2020, there were more than 34,000 explicit sanctions across more than 280 sanction programs, with an increase of 62% since September 2017.
Consequences of a Sanctions Breach
Failure to comply with AML laws and breaches of sanctions can have severe consequences, including punitive fines, criminal proceedings, damaged reputation and sanctioning.
For instance, breaches of financial sanctions in the UK are criminal offences, punishable by up to 7 years in prison and monetary fines levied on individuals and businesses found in breach. Similarly, the US Treasury Departments’ Office of Foreign Assets Control (OFAC) considers violations as a grave threat to national security and foreign relations. Consequently, offenders face monetary fines of up to several million dollars and prison time up to 30 years.
A number of firms were heavily fined for OFAC breaches, in some cases exceeding $1 billion. These include ZTE, Standard Chartered, BNP Paribas, Crédit Agricole, Société Générale, and UniCredit.
All these consequences can seriously damage an institution’s reputation, credibility and performance. Becoming a sanctioned entity can be even more damaging, as it significantly hinders, if not halts, an institution’s ability to conduct global business, access international markets and capital. These consequences have, in some instances, led to a sanctioned institution’s complete inability to continue operations and ultimately its demise.
In summary, sanctions breaches constitute serious offences and thus have a severe impact. Therefore, institutions must check their customers against relevant sanctions lists as efficiently and accurately as possible. However, as sanctions lists are updated constantly, it is crucial to ensure that screening processes keep up with changes whilst avoiding inefficiencies and reducing false positives.
Importance of choosing the right AML/KYC Customer Screening partner
Despite the inherent challenges of Customer Screening, the right AML/KYC partner can help you with implementing a robust and cost-effective solution, as outlined below.
- Single Customer View: Sanctions Screening is only as effective as the input data used to screen the entity or individual at hand. Therefore, it is recommended to leverage a solution that will help you streamline data collection processes and provide you with a single customer view that is aggregated, consistent and holistic.
- Comprehensive Data Coverage: Screening activities should build on thoroughly studied and regularly revised global risk information that includes the current PEP and sanctions lists, unfavourable media, and compliance reports from around the world.
- Smart Screening: Numerous vendors market fuzzy name matching as a silver bullet for state-of-the-art screening. However, fuzzy name matching should not be solely relied upon. It does indeed account for misspellings and minor variations. However, it does not deal well with phonetic similarity, transliterations, linguistic variations, non-Latin scripts, patronymics, honorifics, titles, out-of-order names, to enumerate a few of the aspects of a reliable screening engine needs to account for.
- Risk-based Approach: A comprehensive screening solution should manage several lists, allow custom thresholds and inclusion/exclusion rules to enable AML officers to adapt the screening capability to the organisation's risk perception and policies.
- Case Management: AML case management, combined with monitoring and alerts, enables analysts to effectively investigate suspicious activity and quickly mitigate financial crime risk. A robust Case Management solution should also provide a fully integrated solution with rich contextualised data, such as a Detailed Match Breakdown, and thus help investigators organise, prioritise, manage investigations and easily discount false-positives – all while creating a permanent audit trail for regulatory review.
- Ongoing Due Diligence: Depending on the customer and your risk mitigation strategy, you may need to include screening monitoring and alerts. Many AML/KYC vendors offer the ability to check customers in bulk via running batches. However, that is a cumbersome and reactive process that is not fit for the new digital age. On the other hand, mature KYC providers will offer continuous monitoring to support the shift from the traditional tick-the-box approach towards real-time, ongoing, and proactive customer due Diligence.
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