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A technology-driven approach to managing sanctions risk for financial institutions

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Current sanctions landscape

Today’s sanctions landscape is evolving quickly and changed significantly over the past decade. Traditionally, sanctions were mostly levelled against whole countries, which were comparatively straightforward to monitor. Now, however, sanctions are becoming a lot more targeted, focusing on specific individuals, industry sectors and / or individuals. This is a much more complex landscape for firms to navigate. 

As well as the UN-mandated sanctions focused on weapons proliferation and terrorism, autonomous sanctions regimes are increasingly being used by jurisdictions such as the US, the UK, the EU, Canada and Australia to fulfil their foreign policy objectives and exercise economic power.

Prior to 2022, there had been significant changes in the geopolitical landscape due to the incoming Biden administration in the United States and the departure of the UK from the European Union. Under President Trump, previous US sanctions regimes had been turbulent with knee-jerk applications resulting in an increase of ~80% in imposed sanctions since the Obama administration. The UK also began to implement its own sanctions policies, introducing the possibility of divergence from the EU.

Sanctions are increasingly being used as a policy tool in international crises, particularly by the EU. 2022 has seen an unprecedented use of sanctions in response to Russia’s invasion of Ukraine, with new sanctions being announced on a weekly basis. Here are just a couple of examples of recent measures that have been introduced:

  • Belarus (5 July, 2022): Financial restrictions – dealing with transferable securities or money-market instruments. Extension on existing capital markets restrictions to include a new prohibition on dealing, directly or indirectly, with a transferable security or money-market instrument issued after 5 July 2022 by a person "connected with Belarus".
  • Russia (26 June, 2022): Trade restrictions on gold exports. Announcement of a prohibition on new exports of Russian gold entering the UK. This import ban will apply to newly mined or refined gold and will not impact Russian-origin gold previously exported from Russia. The ban will be introduced "shortly".

Other geopolitical “hotspots” that firms must be aware of are China, North Korea and Eastern Europe, among others. 

A graph to show the relative size of sanctions lists as of February 2022 across US, UK, EU, Canada and Australia.
Source: Control Risks (2022) Navigating the global sanctions landscape in 2022

The benefits of effective sanctions management

The current sanctions landscape is incredibly complex and fast-moving, showing little sign of slowing down in light of the current geopolitical issues and tensions. Institutions need to ensure that they obtain a thorough understanding of their sanctions risk exposure in order to deploy effective mechanisms to manage the associated risk. This is particularly important for respondent banks that are operating in high risk jurisdictions or those which have significant exposure to Eastern Europe, Russia, China and alike. 

Using more innovative technologies and tools to manage sanctions can derive significant benefits for firms: 

Reducing regulatory risk:

Those who implement advanced technology will likely reduce their exposure to fines and penalties resulting from sanctions violations. This is particularly important when considering U.S. secondary sanctions.

Reduction in overall financial crime risk exposure

Utilising comprehensive, data driven analysis to monitor financial crime risk is particularly important for respondent banks operating in high risk jurisdictions or with exposure to high risk industry sectors or countries. Utilising such technology serves as a means of demonstrating to correspondent banks that they can be trusted. 

Reduced costs

Automating sanctions screening will not only reduce risk but will also reduce costs significantly, and by using more advanced technology, false positives will also be reduced, increasing efficiency and freeing up resources to focus on higher value activities such as alert investigation.

Overcoming operational and technological challenges can be the first step to achieving an effective sanctions management programme - one that supports existing KYC and AML programmes. A good sanctions risk management programme is efficient and often based on robust data to provide actionable insights that help institutions detect financial crime earlier and avoid sanctions and fines by being aware of sanctioned individuals. We detail how to overcome current KYC challenges whilst managing sanctions risk here.

Risk management tool - evaluate sanctions risk with the EFI

In the coming years, the pressure on the financial sector to manage developments across global sanctions regimes will only grow. In order for institutions to effectively manage the dynamic and complex landscape, a new approach is warranted. 

Elucidate’s Fincrime Index offers the first regulated risk scoring system for financial crime, enabling institutions to address this very challenge through simplifying the management of global sanctions exposure.The EFI leverages data-analysis and machine learning to score and price financial crime risk, offering a comparable and comprehensive view of a bank’s own risk to global sanctions, as well as that of its counterparties.The EFI runs over 1,200 discrete tests against the 20,000 institutions it has rated to date and its assessments are augmented by including globally recognised inputs such as Wolfsberg’s Correspondent Banking Due Diligence Questionnaire (CBDDQ) to derive an overall aggregate EFI score, as well as a detailed view of performance in individual risk areas. This enables firms to identify and measure financial crime risk through sophisticated automation. 

The EFI’s scores are updated on a monthly basis akin to global developments in sanctions regulation and any changes in corporate structures and ownership; it provides automated reports with updated EFI scores across a range of regulatory themes, of which sanctions is one, as well as providing explanatory findings that underpin any changes. 

Subsequently, the EFI enables firms to define and track remedial measures as well as providing valuable insight that can be shared with selected external counterparties in a secure environment, ranging from summary data to deep-dive, detailed reports. You can try the EFI today by booking a demo here.

Did you enjoy this article? It was originally published as part of our e-book 'Sanctions and War: the Impact to Financial Institutions in a Complex Landscape'. You can download your free copy below.

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Elucidate team
Elucidate team
https://www.linkedin.com/company/elucidate-gmbh/

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