Enhancing sanctions screening and due diligence
December 2022 | TALKINGPOINT | GLOBAL TRADE
Financier Worldwide Magazine
December 2022 Issue
FW discusses sanctions screening and due diligence with Charmian Simmons, Ben Princen and Enda Shirley at SymphonyAI NetReveal.
FW: Reflecting on the last 12 months or so, how would you describe the change in the global sanctions landscape? What key trends persist?
Princen: The war in Ukraine has changed the dynamics of sanctions screening, though the ‘net effect’ can be thought of as ‘limited’ over the course of the year. On the one hand, a huge amount of Russian-related records were added, causing a surge in sanctions alerts. This was negated however, as the exclusion of many Russian banks from the Society for Worldwide Interbank Financial Telecommunications (SWIFT) caused a dramatic decrease of sanctioned transactions overall. From an AML compliance perspective, this resulted in a status quo in volumes, and more of a shift in alert typology. From a screening perspective, the need for a new type of sanctions – geographical ones – led to them making an appearance on a large scale. And where a number of financial transactions in the non-occupied west of Ukraine are allowed, they may no longer be in the occupied eastern regions.
Simmons: Sanctions have changed dramatically in 2022 and increased the complexity for anti-money laundering (AML) compliance functions, largely due to the geopolitical situation between Russia and Ukraine. According to Statista, by the middle of October 2022, approximately 12,000 restrictions were imposed on Russian individuals, companies, vehicles and aircraft, which is significantly higher, almost four times, than previous years. Perhaps with the exception of financial institutions which are heavily regulated, other industries and sectors have truly felt the impact and significance that sanctions screening plays in conducting business. Not only has the volume of sanctions issued changed, the ability to keep pace with the frequency of issue, especially in the early part of the year, and now with revised red alerts, such as the UK’s National Crime Agency (NCA) multi-agency red alerts, has had a profound impact on many businesses’ agility. Ongoing trends are sanctions evasion and sanctions complexity. Both can present further AML regulatory adherence challenges as well as new red flags to monitor, such as for crypto assets.
Shirley: Sanctions, a non-violent method of impacting war and criminal activity, has, as a term, been more prevalent than ever in mainstream media over the past 12 months due to global unrest and in particular, the Russian invasion of Ukraine. A growing number of people within society now see when another ‘round of sanctions’ has been released and learn of the various impacted assets of oligarchs, such as football clubs and audaciously oversized yachts. The outcome of the Russian invasion of Ukraine and the resulting volume of sanctions may produce a more inquisitive society that seeks more information about the flow of dirty money around the globe and asks more questions about why the balance remains firmly weighted toward nefarious actors.
“Good technology is like a good referee. You do not notice it during investigations, unless it makes a bad decision.”
FW: In connection with the Russia-Ukraine conflict, how severe are the sanctions imposed upon Russia to date? What do these sanctions mean for companies doing business in Russia, or with Russian-linked entities or individuals?
Simmons: The increase of Russian sanctions has complicated the process of doing business with Russia and across Europe for Russian-based companies. So much so, some companies have retreated from the country altogether, and Russian oligarchs, industry tycoons and their associates have relocated to other countries as an avoidance measure. Those that are still operating in the region are experiencing great difficulties with money movements and their supply chain. Legal and compliance teams outside of Russia have had to tune and adjust their systems and processes and install measures to try to prevent transactions from happening. This has given rise to cryptocurrencies being used more and more by individuals in response to sanctions, for which many banks and platforms are not adequately monitoring for key red flags, such as transactions initiated or sent to IP addresses located in Russia, Belarus or other high-risk jurisdictions showing a willingness to do business with Russia or sanctioned digital wallets.
Princen: It is hard to see the complete picture yet, as most companies are also impacted by other factors, such as coronavirus (COVID-19)-related issues. Only when that dust finally settles can we see the true net effect of the sanctions. While multinational companies have withdrawn from the Russian market, the impact of the supply chain for smaller suppliers is unknown. It is likely that smaller companies may be more impacted than larger ones. It will probably take a while before the Russian regime will truly feel the consequences of sanctions. Sadly, this is not the case in Europe, where the dependency on Russian energy is causing an enormous impact on the daily life of its citizens, with energy prices surging. People are facing huge bills and companies need to limit production. As an industry, we need to ensure that sanctions are applied to have a maximum effect on the Russian regime, and with minimal implications for the rest of the world. That is a difficult exercise.
FW: How important is it for companies to conduct thorough due diligence screening before engaging with entities today? What aspects need to be assessed which may give rise to red flags?
Princen: While company structures are becoming more and more complex, we live in a digital world where relevant information is more accessible every day. This allows us to extend the scope when searching for red flags. Information that is globally available helps Know Your Customer (KYC) systems and investigators to thoroughly analyse factors such as the geographical location, to assess whether the customer is working in or near sanctioned locations, the complexity of the company, to assess whether the customer is working in different countries, the complexity and volume of transactions, and the type of products involved. It is also necessary to ensure that the entire supply chain of a company is investigated, since parties, both upstream and downstream, can be involved in illicit activities.
Simmons: Geopolitical events in 2022 have exponentially increased the importance of robust due diligence. Implications, both financial and reputational, for not knowing who you are doing business with, or who your ultimate customer is, are real, and regulators globally are acting on this. Robust due diligence applies to initial onboarding as well as ongoing monitoring to identify changes in circumstances and behaviours. Knowing where source of funds originates, where source of wealth originates, if any AML flags are triggered that elevate risk, who an entity is connected with, and utilising a client profile with dynamic risk scoring that accounts for changing factors, are all a must.
Shirley: Thorough due diligence is essential from a reputation, regulatory and moral perspective. From a regulatory perspective, monetary fines follow those that do not comply. Also, as cloud and other technologies such as distributed ledger become more mainstream in financial crime compliance, organisations have a growing moral and social obligation to keep bad actors out and shine a spotlight on their illicit activities. Corporate entities must come with a clear and defined beneficial ownership structure, with any suggestion of identity obfuscation triggering an investigation. This could be structures leading to tax or terrorist havens or simply leading to nowhere, with no ultimate beneficial owner. Bad data should be challenged, as criminals can use easy-to-access registries and create companies to purposely overcomplicate and hide the trail back to themselves.
“While you absolutely need to know if you are dealing with a sanctioned entity or person, there is a shift nowadays to include other categories as well.”
FW: What challenges do companies face when trying to identify the true nature of opaque ownership structures?
Simmons: Complexity in ownership and control structures is still an ongoing challenge, and making the setup more complex allows for concealment of beneficial ownership, source of funds and tax evasion. This is further complicated by the fact that many company registries are not always up to date or store the same data fields which could allow for information matching and sharing between countries. Compliance functions often therefore turn to data providers and technology solutions to interpret and connect data in the best way possible, to piece together how the structures are set up and changing, to demonstrate due diligence and manage risk.
Princen: Another country is just a click away and it is too easy to set up shell companies to hide true ownership. The lack of a global registry and insufficient cooperation between countries has a big effect on analysing structures. It is still too easy to set up complex structures to stay under the radar of not only governments, but also companies that want to know who they are dealing with. The cost of composing an accurate ownership graph may be high for many companies and can limit the due diligence capabilities that they are willing to perform.
Shirley: Though regulations globally, including most recently in the US, have transposed into law beneficial ownership registry requirements, data quality and ease of obfuscating data within registries remain problematic. As a result, identifying risk and validating corporate information within these structures often requires significant manual overheads.
FW: What steps can companies take to build a complete, accurate picture of a potential customer or business partner?
Shirley: Generally, mapping a full customer profile, from geography to product and from occupation to intended behaviour, will enable a strong starting point for attributing customer risk. Those standard profile elements, mapping almost directly to global regulations and Financial Action Task Force (FATF) recommendations, provide the initial framework. Beyond that, automating and digitalising all of this data being gathered, presented and importantly risk assessed on a continuous basis, and from a range of internal and external sources, means solutions can target increasing levels of efficiency. Efficient solutions can then take more risk elements, such as adverse media, analytics and machine learning (ML), into consideration and really refine their risk models and investigations. This reduces customer friction by reducing risk for customers needlessly identified as high risk and reduces an organisation’s exposure to risk by identifying customers with a prohibited level of risk who can then be reported and off-boarded.
Simmons: ‘Perpetual KYC’ is gaining more traction now as a viable solution to forming and maintaining an accurate and holistic view of a customer and supporting sanctions monitoring. Moving away from periodic reviews only, to more of a hybrid trigger event-based review that includes a periodic refresh approach as backup, is a key first step. Once comfortable with this approach, moving to a full event-driven approach – perpetual KYC – allows all aspects of data to be built into customer profiles and drive risk ratings in an ongoing manner. It also means profiles are updated with new information and assessed immediately, facilitating ‘intelligent’ rescoring.
Princen: A good screening system goes beyond sanctions. While you absolutely need to know if you are dealing with a sanctioned entity or person, there is a shift nowadays to include other categories as well, such as negative news. Screening beyond sanctions helps financial institutions to build a complete picture of their customers. Additional information will help to recognise suspicious patterns on an ongoing basis but will also help as a filter during the initial onboarding. Crime comes in many forms today and all too often, financial institutions are used without their knowledge to provide criminal networks with resources. Screening as much information as possible and having a holistic system that can make sense of this data is essential.
“Technology is a key enabler to managing the volume and change frequency of sanctions management and understanding regional sanctions exposure.”
FW: In what ways can technology help companies to identify and manage their sanctions risks?
Simmons: Technology is a key enabler to managing the volume and change frequency of sanctions management and understanding regional sanctions exposure. It is very difficult to be effective and efficient in sanctions screening and investigations without it today, given the high daily transaction volumes, the number and complexity of sanctions lists, and the fast-moving pace we have experienced this year. Market-leading solutions today can timely ingest and screen lists, generate and case manage sanctions alerts, show family and connected-party relationships, company hierarchy data, and visualise exposure data. They can aid in identifying watchlist patterns to learn from and offer flexible screening algorithms and artificial intelligence (AI) for more efficient screening.
Shirley: Good technology is like a good referee. You do not notice it during investigations, unless it makes a bad decision. Sanctions solutions had historically been linked with a high volume of false positives. This has changed. Good sanctions solutions should now not only give organisations the opportunity to significantly reduce false positives, they should also be intelligently analysing list quality and information, past investigations and customer profiles, in order to suggest to users when an investigation is more likely to be a true positive and to give the option of automatically hibernating investigations it clearly deems as false positive.
Princen: Technology can provide more context to sanctions-related alerts by looking beyond the match. Because, in the end, sometimes John Smith just matches John Smith. It is other data points and third party provided information that will help build a better sanctions screening solution. The main problem in name screening was, and increasingly is, the high rate of false positives. True positives can get lost in the large amount of low quality alerts. Regulators around the world nowadays accept a risk-based approach if it is based upon criteria that make sense. Automation and data enrichment can help achieve that and provide better triage capabilities. Through deep automated investigation during post processing, and enrichment with third-party data, automated decision and faster investigation of alerts is possible, reducing the overall sanctions risks.
FW: What essential advice would you offer to companies on assessing technology solutions available on the market, and integrating them with existing systems? What steps should companies take to ensure the process is as smooth as possible?
Princen: For a sanctions screening system, no one size fits all. This is clearly referenced by the Office of Foreign Assets Control (OFAC), as well as the Wolfsberg Group. To evaluate what solution best meets companies’ needs, they should, first, properly understand their sanctions risk approach and exposure, and secondly, assess if they truly have a sanctions-oriented culture at the management level to provide the required support for implementing a good solution. Thus, it is essential to choose a solution that not only offers an out-of-the-box approach that can be deployed fast, but also one that gives flexibility to easily adapt to the specific risk of the company, the jurisdiction where it operates, and the knowledge of the people using it.
Simmons: Articulate your requirement must-haves versus nice-to-haves, where you can be flexible and understand the vision of your AML compliance programme maturity. Know your regulatory obligations for the regions you operate in and what changes are coming into regulation in the next few years, and where you may have had trouble complying in the past. Ask questions to the vendors and have them demonstrate key actions, tasks or even benefits you want to achieve in a new solution. If you are integrating a solution with other vendor solutions, consider how they will interface, especially if blending newer technology with older versions, if and how much customisation may be required by your team or the vendor, and how scalable the solution is to accommodate business strategy and growth.
Shirley: Demonstrable benefits are key, as is the ability to dynamically support regulatory and operational requirements. Put potential technology providers to the test against these measures, specific to requirements. A strong stakeholder forum is critical. Senior and C-suite stakeholders too often makes decisions, such as changing how a business unit would run investigations based on vendor solutions, without getting proper buy-in from business users using the solutions and running the investigations. This leads to complex projects and a longer than necessary time to value.
FW: How can technology solutions evolve further in the coming years when it comes to sanctions, screening and due diligence to advance anti-money laundering (AML) efforts?
Shirley: We are venturing into an AI-led future. Historically, fraud, and more recently AML for transaction monitoring, have adopted ML to detect new risks and improve the quality of existing investigations. AI and ML can identify behaviours and patterns a human cannot. When applied to customer risk – for KYC due diligence – sanctions and screening, the result will be a higher quality of both customer risk profiles and screening matches coupled with lower investigation effort. An example of this, for risk-profiling customers, is behavioural risk. Detecting irregularities within transactional behaviour against peers and expected use can provide key indicators of suspicion. ML can detect these risks using intelligent algorithms and identify trends and typologies a human could not.
Simmons: One area of future advancement is how to better utilise data post-processing to inform our understanding of risk and customers and suppliers. The volume and speed of transactions per day is increasing and, coupled with the evolving methods of those trying to avoid detection, it makes it harder to identify patterns of crime and illicit money flows. Being able to use data post-processing to build profiles that are more holistic, that are shaped by risk scoring, behaviours and transactions, increases the ability to detect and prevent money launderers and evaders. A second area aligned more closely to due diligence is centred around risk scoring. Advancements can be made in risk scoring to expand to other screening capabilities – to advise banks and companies on higher risk profile entities to help manage risky customers and suppliers. This aids better false positive rates and suspicion detection overall.
Princen: Sanctions name screening will be less about the names, and more about the entire picture. In the end, screening systems have to be able to work out if the name really belongs to the person or entity being looked for. Many factors can predict if we are dealing with a good or bad quality alert. In fact, there are so many of them that it becomes impossible for humans to understand what is going on and how all contributing data points come together. Technology will allow sanctions screening to focus on its core purpose: to identify people and entities on sanctions lists and remove all the noise that is created while operating a sanctions solution. AI will help in limiting the risk in a world where sanctions lists are growing almost exponentially.
Charmian Simmons is a financial crime and compliance expert for financial services covering the EMEA region. She has over 20 years of experience in the financial sector across risk management, financial crime, internal controls and IT advisory. She is responsible for providing practitioner expertise, thought leadership and analysing key policy, regulatory, cultural and technology drivers transforming the compliance market. She is CAMS, CRMA, CDPSE and CISA certified. She can be contacted by email: charmian.simmons@netreveal.ai.
Ben Princen is the product manager of the NetReveal WatchList Management solution. He joined the company over 17 years ago where he held various positions: technical consultant, solutions architect and pre-sales specialist on the NetReveal compliance software suite. As part of the services, sales and product teams, he was involved in many major and complex financial crime projects. He is a certified sanctions specialist (ACSS). He can be contacted by email: ben.princen@netreveal.ai.
Enda Shirley is an anti-money laundering specialist, with over 10 years’ experience supporting financial services institutions. His work at SymphonyAI NetReveal includes managing the strategy and vision of its financial crime compliance products, enabling financial institutions to tackle the evolving money laundering landscape effectively and efficiently. To do this, he combines the very latest technology with his deep understanding of FATF, as well as local legally binding regulations. He can be contacted by email: enda.shirley@netreveal.ai.
© Financier Worldwide