co-authored by Sascha Steinbach-Vulin and Elird Kospiri
Is the time for fully automated sanction screening solutions arrived? The increasing complexity of international sanctions push financial institutions to look after new solutions approaches to cope with the increasing number of false positives.
The complexity of international sanctions
The complexity of international sanctions regulation has been continuously increasing over time. Most of the total embargoes that were implemented in the past have already been replaced by sectoral and list-based sanctions targeting individuals, entities, and activities rather than blocking trade with entire countries. While the negative externalities are being minimized by this transition, the increased complexity is making sanctions screening more difficult. Significant fines lurk on the horizon for those financial institutions struggling to build a robust sanctions screening programme. The financial consequences are not the only concern. Doing business with sanctioned governments, entities, or individuals can also result in a public backlash that can cause severe reputational damage.
Challenges with sanctions screening
The first step in building a robust screening program and mitigating the underlying risks is to objectively identify the challenges associated with sanctions screening. Based on our past experience, we have identified the following challenges across financial institutions:
- The constant updating of sanctions lists due to a rapidly changing geopolitical environment is one of the most critical challenges facing financial institutions. The geopolitical events of the past year, culminating in Russia’s invasion of Ukraine, have clearly demonstrated the dynamic and fragile nature of the sanctions environment. For financial institutions with global operations in particular, this challenge is compounded by the fact that such institutions must adhere to an even greater number of relevant regulatory regimes, resulting in an increased volume of potential sanctions matches.
- The daily dilemma of a sanctions reviewer: “True match” or “false positive”? Determining a true match is a highly complex process due to the presence of many variables. Language and cultural differences, spelling, acronyms, and aliases are some representative sources of complexity. But it becomes even more complex for certain sectoral sanctions programs, where the underlying activity and often opaque corporate structure must be fully understood and resolved. Furthermore, in certain highly complex transaction screening cases, psychological aspects may play a decisive role in adjudicating generated alerts. Unlike automated reviewing tools, human reviewers may be prone to subjectivity and selective perception leading to inconsistent decisions.
- More is more: There is a tendency to over-screen due to extensive fuzzy matching. This leads to an exponential increase in false positives and manual review, jeopardizing the effectiveness and efficiency of the entire screening process. On the other hand, it is important to note that extensive fuzzy matching can also reduce the risk of false negatives. The trade-off between false positives and false negatives is always in favor of the latter. In other words, given the high potential for financial and reputational damage, the avoidance of false negatives is more essential than the reduction of false positives and manual review. As a result, financial institutions should accept the high volume of false positives as a non-negotiable reality.
- “Data is the new oil”. There is no sanctions screening without data. The performance of sanctions screening depends on a number of factors, including the availability, completeness, quality and integrity of data. The data collection lifecycle typically begins with customer onboarding and ends when the customer relationship is terminated. Manual data entry throughout the data collection lifecycle, especially during onboarding, can be prone to human error (typographical errors, non-standard entries, blank values, etc.), which can compromise the completeness and quality of the data. In addition, the aggregation of data from multiple sources creates the potential for data integrity issues. Overall, the completeness, quality, and integrity of the data directly determine the effectiveness and efficiency of a sanctions screening programme.
Although automated sanctions screening tools that identify potential sanctions matches for further review have become commonplace, the manual review burden remains significant due to the challenges outlined above. While some financial institutions have already embraced and implemented semi-automated solutions that help identify similar patterns and constellations of attributes that lead to the generation of false positives, thereby reducing the manual review burden, others are hesitant to move in this direction. Soon or later most of financial institutions will end up implementing semi- or fully automated solutions to cope with the increasing number of false positives.
Gerardo Salonia is a senior principal within our financial services practice in Germany with a focus on compliance, AML and KYC areas. He has extensive consulting experience within the e-commerce and financial services domain. Gerardo has enabled several European companies and financial institutions to overcome the challenges posed by disruptive technologies and transform into digital-oriented organizations. Gerardo holds an MBA in business administration from the University of Mannheim. He is a certified AML officer and has a risk management certification from the Goethe Business School – Frankfurt University.
Sascha Steinbach-Vulin is a Senior Consultant with over 5 years of experience within the financial services industry, particularly within the field of AML Compliance. During his engagements at various large German banks, he could gain valuable insights regarding financial institutions´ AML landscapes while focusing strongly on transaction monitoring and case management procedures. In so doing, Sascha has been successfully supporting large bank clients in several transformation and optimization initiatives to achieve cost reductions and improve overall AML alert handling and case management efficiencies. Sascha holds an MA in International Management from the International School of Management Frankfurt am Main.
Elird Kospiri is a Senior Consultant with over 5 years of experience in the financial services industry, with focus on Compliance, Risk and Regulatory. Being part of various projects at large German financial institutions, enabled him to gain valuable expertise regarding sanctions monitoring, AML and outsourcing regulatory. He has contributed to transforming and optimizing compliance frameworks and internal control tools of several financial institutions. Elird holds an B.Sc. in Business Administration from the University of Cologne.