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When the Sanctions Stakes Keep Rising, Conventional Solutions Don’t Work

When the Sanctions Stakes Keep Rising, Conventional Solutions Don’t Work

UK authorities have restated the sanctions rules for financial institutions. Compliance and financial crime risk management leaders in financial institutions will be held accountable if they don’t provide the compliance function with necessary resources, processes and technology. 

In March, the UK Office of Financial Sanctions Implementation (OFSI) reiterated its guidance on enforcement and monetary penalties for processing payments to sanctioned individuals, entities and bodies. In doing so, it put a shot across the bows of financial institutions (FIs) and other businesses about the need to remain compliant.

Within the guidance, there’s a stark warning about the risk of breaking the rules – even through ignorance. Should a penalty be considered, OFSI could impose the statutory maximum, which is the greater of £1 million or 50 per cent of the value of the breach. 

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Compliance leaders might be forgiven for thinking that OFSI doesn’t enforce many penalties. Since its inception in 2016, it’s issued just eight fines to the value of about £21 million, with the most recent penalty reaching £30,000. In stark contrast, the US Office of Foreign Assets Control (OFAC) has issued 92 fines since January 2017, adding up to £1.5 billion

But OFSI has doubled the number of permanent staff available to work on policing the rules. It’s clear that this increase and its restating of the rules is a sign of the stakes rising. The UK sanctions regime has shown it means to move quickly and decisively when rules are broken. Financial institutions must take note and reassess their compliance plans. 

A Two-Part Response

A major element of any compliance strategy is technology. In this instance, there are two key parts required. Firstly, a screening solution that can stop sanction-breaking transactions as they happen. This needs the power to sufficiently monitor and analyze transactions data in real-time to ensure no illicit funds are authorized. At the same time, the screening solution needs to be efficient enough to meet the transactions service level agreements without increasing the cost of compliance. 

This in itself is a huge challenge and a very delicate balance that FIs needs to find. But a solution like this is only half of the puzzle. The second part that’s needed is an up-to-date sanctions list, combining the latest data from all global authorities.

Feeding accurate and timely information to screening engines is critical, as delays can expose institutions to operational, reputational, financial, and political risks. And keeping up with the ever-changing regulations makes managing sanctions risk more difficult.

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The conventional ways of updating the watchlists do not ensure the authenticity of the used data due to human intervention, unreliable and untraceable manual processes, and inefficient technologies. 

Today’s fast-moving world pushes FIs to stop updating sanctions lists manually. And CEOs, compliance officers and senior managers need to take immediate action to mitigate the risks of manual intervention. They are all accountable.

Use the Power of Distributed Ledger Technology

FIs must automate sanctions list updates as these lists grow in volume constantly and continuously. This is where real-time automated watchlist updates using distributed ledger technology (DLT) come in.

By using DLT as a backbone for their sanctions list update tool, FIs can enhance the efficiency and security of the process. A DLT-enabled tool can be a trusted, reliable and efficient courier. It takes updates from the lists provider and injects them directly to the screening engine in real-time, with no human intervention or downtime. 

The immutability of the ledger guarantees the authenticity of the data. Furthermore, all updates on the chain are traceable and time-stamped. This allows compliance teams to easily carry out historical reviews and audits (lookbacks).

Updating sanction lists at any time of the day with full confidence of complete information will ensure that all entities connected to the ledger are synchronized, bringing harmony and eliminating conflicts in decisions.

Importantly, these benefits come with the added bonus of eliminating the administrative burden of manual work. With so much to contend with, compliance teams need to focus on adding value and overseeing processes rather than having to complete tasks themselves. There will be many who can testify to the pain of having to finish an after-hours manual update. 

Automating sanction list updates has never been more crucial. Sanctions are being introduced on a rolling basis in the UK following Russia’s invasion of Ukraine. The government has said, “Nothing is off the table”. At the time of writing, 1,550 individuals and 180 entities are subject to UK sanctions under the Russian regime. Not to mention the 1,473 people and 205 entities sanctioned by the EU and more around the globe. 

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With longer lists that are constantly updating, and a regulator flexing its muscles, now’s the time to act. When the sanctions stakes keep rising, financial institutions need to be innovative.

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