Article on Thomson Reuters Regulatory Intelligence – Industry collaboration can re-invent sanctions screening

Unique industry collaboration to re-invent sanctions screening

Every year, the financial services industry screens tens of billions of transactions to look for links to sanctioned entities, but the existing approach suffers from two main integral problems.  

The first is one of scale. Transaction volumes are continuing to rise alongside the increased use of sanctions as an international tool. The second is one of duplication – every financial institution repeats the processes of everyone else, sourcing the same lists, generating the same alerts and discounting the same false positives. But could a central capability, driven by participants, address these issues and unlock benefits for all?

The need for change

The numbers are material and are increasing. Currently, there are over 52,000 ‘persons’ (individuals, entities and their aliases) sanctioned by international governments (for example, the US Treasury’s OFAC) and international bodies (such as the UN), according to Refinitiv’s Global Sanctions Index. This is a massive 270% increase from five years ago.

On the other side of the equation, cross-border transactions are growing. An estimated, $150 trillion was transferred in cross-border transactions in 2017. This is expected to increase to over $250 trillion by 2027 (source – Bank of England).

Even in the financial institutions with the most effective processes, our estimates suggest that, at best, 5% of all cross-border payments traffic is being stopped, with many institutions putting a far higher percentage of traffic on hold.

Given that the respective authorities publish sanctioned entities, these ‘bad actors’ know not to use their names or even variants of their names. The effect is that the industry today generates over one billion false positives every year, each of which will have been processed by multiple financial institutions, with almost a quarter of all these alerts taking over a day to resolve – and less than one percent of all alerting transactions being reported to the relevant authorities. Overall, this is resulting in millions of transactions being delayed. Transaction screening is therefore a critical preventative control but one that creates significant friction. That needs to be changed.

Consistent standards, universally applied

So how do we address these challenges that are plaguing financial services? The answer is to look at this problem from an industry perspective and agree on a global approach to avoid the duplication of each financial institution repeating the process. To do this, three elements need to be in place:

1.  Industry standards

2.  Secure technology

3.  Regulator support

Industry standards 

Standards have been developed covering everything from list management to data matching, to reporting and assurance. By applying these agreed requirements, the industry cannot only evidence high standards, but they can also be used consistently – removing friction, providing confidence and eliminating cost.

Secure technology 

as businesses increasingly realise the benefits of cloud, privacy and security by design, applications have been able to deliver scale, ultimately delivering solutions that were previously out of reach. The adoption of secure technology means industry-leading standards can be made available to all participants safely and securely, which in turn means that more businesses are able to deliver effective screening at a larger scale and protect themselves from wider risks.

Regulator support 

A key part to solving this issue is that we need industry collaboration across all stakeholders – and regulators have to be at the heart of this. It’s a vital step is that regulators across North America, EMEA and Asia have their input into new technologies. With regulator feedback and support, technology and platforms can be best suited to help financial services, especially as this part of compliance landscape is re-designed.

Moving the industry forward

The use of sanctions will continue to stay high on the agenda for governments and regulators. However, due to the growing number of false positives, which is resulting in millions of transactions being delayed, a system for screening sanctions that cannot cope with the scale of the problem is not fit for purpose.

To tackle this issue, we must collaborate as an industry to utilise suitable and high-quality technology that will be able to deliver effective sanction screening. By collaborating across borders with the industry and establishing a global standard, we can build a more effective and efficient approach to sanctions compliance. Reducing friction will not only help financial institutions save costs, but it will also deliver a win for the end customer themselves.

‍This article was first published on Thomson Reuters. You can read the full article on Thomson Reuters Regulatory Intelligence
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