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Sanctions Screening: go beyond the lists

Episode
/
March 22, 2022

Sanctions screening is a critical part of an effective compliance program. But looking beyond current sanctions lists reveals related risks that firms must also manage.

To screen for sanctions and politically exposed persons (PEPs), you need accurate and up-to-date information. But robust customer screening must go beyond current lists of sanctioned entities and individuals, and uncover the numerous risks connected to sanctions.

Countries subject to economic sanctions often experience an increase in sanctions-related crimes, such as bribery and money laundering. Screening only for sanctions and PEPs does not reveal these consequential offenses. Another hidden risk arises from previously sanctioned entities and individuals. Current sanctions lists do not show up names that have been removed – yet this knowledge bears on your decisions about new and existing customers.

 

Circumventing sanctions

The concept of relatives and close associates is understood in relation to PEPs, but not necessarily other entities. Although corporate entities have no relatives, they have close associates: ultimate beneficial owners, controllers, and other senior figures. You must also be aware of other parties ‘one step removed’ from a sanctioned entity, such as intermediaries that act for clients wishing to circumvent sanction regulations. Your compliance regime has to go beyond know your customer, to know your customer’s customer.

Intermediaries represent one way of trading in breach of sanctions. Another common method is to falsify deal documentation. Banks are subject to significant fines for ‘stripping’ information from payment instructions or asking clients to ‘amend’ instructions to omit any reference to sanctioned entities or countries. An appropriate control mechanism must be in place to identify such manipulation.

Virtual currencies can also be used to get around restrictions, and governments are adding crypto wallet addresses to sanctions lists. Even when financial institutions monitor transactions closely, cryptocurrencies can add opacity. Funds in a crypto wallet could have been moved from a sanctioned account in a way that is hard to trace. Some financial institutions are looking to screen payments in real time; doing so augments their transaction monitoring and can establish whether any latent sanctions risks remain.

A risk-based approach

However thorough your sanction checks, you cannot detect and prevent every threat. A risk-based approach balances costs with a realistic assessment of the threats so that you can focus compliance efforts for the greatest impact.

A trade-off also has to be made as checks are broadened so that false positives can be minimized. AI can help to manage the growing amount of data. Machine learning can ‘decide’ whether a screening match should generate an alert. Using such technology can improve operational efficiency without compromising effectiveness. This approach can help to determine the average daily alert volume so that resources are allocated accordingly and screening parameters adjusted.

An automated process is also far more consistent in its decisions than human analysts. But whether checks are done by people or machines, the screening results are affected by the quality of the personal identification information captured at onboarding.

To request a complimentary exposure check or to learn more about our sanctions screening offering please contact us.

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