by Tom Scampion, Co-Founder and CEO of Global Screening Services (GSS)
2022 was the year that sanctions compliance became front page news as the international community responded to Russia’s invasion of Ukraine. With the number of entities sanctioned by the Office of Foreign Assets jumping from just over 1,000 in 2021 to well over 3,000 in 2022, the unprecedented increase in the volume of designated entities created operational challenges that financial institutions had never seen before. The battle to deliver effective yet efficient sanctions compliance continues to be the focus of the entire community – both the regulated and the regulators.
With the growing complexity and volume of sanctions, financial institutions and payment providers face a crucial question: how can they improve compliance processes without adding friction for their customers?
Sanctions Hurdles for Banks
Banks are grappling with significant challenges in today’s climate. The sheer growth in the size, scope, and complexity of sanctions lists is unparalleled. This overwhelming expansion has put existing screening processes under immense pressure, compounded by a staggering 99.6% false positive rate for sanctions alerts. Only four in a thousand sanctions alerts from typical compliance processes are true hits, meaning an incredible wasted effort for compliance teams – and accompanying cost.
The inefficiency of current systems is strikingly evident, causing significant delays and operational challenges. Financial institutions also often duplicate screening efforts, with multiple FIs in a payments chain conducting the same checks on the same individuals (and mostly resulting as false positives). This further delays payment processing times and escalates costs. Each institution, driven by regulatory requirements, conducts its own screening, and these compound inefficiencies in cross-border payments add up, causing major delays and friction.
Importance of Robust Sanctions Compliance
Effective compliance processes can support this by streamlining operations and reducing transaction delays. Streamlined compliance is fundamentally dependent on deploying the most effective technology for transaction screening. According to the US Department of the Treasury’s guide on complying with the Office of Foreign Assets Control (OFAC) sanctions requirements, one key reason for failure is the ineffectiveness of sanctions screening software, often due to outdated or missing sanctions list data. Effective sanctions screening relies on accurate, up-to-date sanctions data and advanced technology for rapid screening.
Effective sanctions screening software not only ensures faster processing times but also enhances the overall customer experience. This operational efficiency helps banks maintain customer trust and stay competitive in the financial market, showcasing their reliability and responsiveness. Efficient sanctions compliance is also crucial for banks to avoid regulatory censure and protect their reputations. By accurately and swiftly screening transactions, banks mitigate the risks of inadvertently facilitating illegal activities and ensure adherence to regulatory standards. This diligence prevents potential fines and maintains the bank’s credibility and operational integrity.
Industry-Wide Collaboration
For banks, the path ahead is clear: an industry-wide approach delivering industry best practice. Consistent standards across the sector will streamline compliance and encourage a culture of collaboration and information sharing, leveraging collective intelligence to combat financial crime more effectively. Greater standardisation across the sector has two key benefits:
- Access to Information: By exchanging standards and insights on emerging risks and compliance best practices, banks can significantly enhance their collective ability to detect and respond to threats. This collaborative approach fosters a more dynamic defence system, allowing institutions to leverage each other’s experiences, stay ahead of potential risks, and swiftly adapt to new challenges.
- Reduced Costs: Pooling resources and expertise enables financial institutions to cut compliance costs significantly. This collective effort transforms compliance into a more sustainable practice, as shared knowledge and tools minimise redundancies, boost efficiency, and ultimately reduce operational expenses.
Central to this strategy is a reliable platform that ensures secure transaction screening and efficient sharing of insights. Advanced technology will play a pivotal role in modernising compliance and keeping pace with the dynamic payments landscape, but it must be integrated within an industry-wide framework.
Collaborative efforts amplify success, and true collaboration generates powerful network effects, increasing effectiveness and efficiency across the industry. Financial institutions can unlock greater value beyond individual efforts by acting as a community of best practices focused on delivering cutting-edge screening capabilities. This approach allows banks to easily overcome regulatory challenges, paving the way for a more robust and efficient global banking landscape.
