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Evolving sanctions & periodic reviews – how illicit funds fall through the cracks

Napier
May 18, 2022

All too often, criminals can launder large amounts of money before their activity is flagged by the financial institutions involved, which poses a substantial risk for both financial institutions and the global economy at large.  

Ironically, current sanctions developments have highlighted just how critical a risk-based approach to ongoing customer reviews is if organisations are to really understand who their clients are and when illicit funds may be falling through the cracks.

In our webinar, Evolving sanctions & periodic reviews – how illicit funds fall through the cracks, our panel of experts below discussed what can be done to overcome the screening challenges financial institutions face every day.

3 reasons why illicit funds are falling through the cracks

1. Poor quality, siloed data

Webinar attendees voted in a poll that data quality is the biggest hurdle they face in sanctions risk management (voted for by 33% of attendees), followed by constantly evolving sanctions lists (23%).  

Excellent quality data is the foundation of everything, especially a risk-based approach. As the well-known adage goes: ‘garbage in, garbage out,’ so it’s important to screen using only accurate, comprehensive and up-to-date data to help with making the right decisions.  

It’s also important to look at more data than only sanctions lists. Having a view of customer account activity at all levels can help analysts understand more about a customer. This is good for two reasons – it can help to detect suspicious activity sooner, and potentially pre-empt if an individual or organisation has links that could lead to them being sanctioned.  

2. Poor customer understanding

Regulators recognise that too many institutions don’t adequately understand their customers and, consequently, the risks they face. Client screening at onboarding is not enough to understand who you are doing business with – it is vital that clients and the transactions are monitored and reviewed on an ongoing basis.

3. Excess noise

Excess noise in the form of false positives limits the time and resources available to analysts and compliance officers to investigate and understand the material risk of high-risk clients.

How to overcome sanctions screening challenges

Adopt best practice data management

As well as using a reputable data supplier, it is important to use a screening system that can aggregate and harmonise data on a daily basis across multiple sources and data sets, including siloed sources.  

It is important for data to be cleaned and understood while recognising that data isn’t always available. For example, since 2014 there has been a significant effort to obscure ownership structures.

Continuously profile customers

A good sanctions screening system can easily keep up with sanctions changes, but data quality issues make it difficult to join the dots to understand customers. It is important that this is addressed because sanctions and KYC (Know Your Customer) customer due diligence are not standalone processes – they are all part of the same review, and any gaps can lead to customer information not being available.

Continuous customer profiling demonstrates to regulators that an organisation has a good understanding of risk and is taking a risk-based approach to AML.  

Use artificial intelligence and machine learning  

Technology is key to being able to digest direct and indirect data and ultimately achieve a 360-degree view of the client and their financial network.  

Large volumes of false positive alerts is a huge issue in screening processes. But feeding data into an artificial intelligence (AI) enriched name matching engine can not only enable complex typologies to be surfaced but will also reduce false positives. This enables analysts to focus on the results and where risk is most likely to come from.

When sourcing an AI system for financial crime compliance, it is important that there is traceability, explainability, and auditability of the AI outputs for not only regulatory compliance but to empower users to understand how the system works and how it reaches its decisions.

Crucially, the right tech partnership with a scalable solution can take away around 80% of false positives and in turn enable analysts to focus their time and effort on material risk. In this way, AI can complement and enable human efforts.  

The RegTech industry is expanding rapidly, with more cost-effective solutions available then ever before. Now is the time for regulated entities to think how they will take advantage of the latest innovations to adapt their systems and stop illicit funds from falling through the cracks.

Book a demo to see the benefits of AI 

The best way to discover how you can transform your sanctions screening process is to see it for yourself. For information, advice or to book a demo on any Napier product, please get in touch with our expert team.

Photo by Dynamic Wang on Unsplash