Effective Sanctions Screening Starts with the Right Data
Sanctions screening—the process of screening individuals, entities, and countries against sanctions lists before conducting transactions with them—is part of the regulatory compliance framework of all financial institutions (FIs). With effective sanctions screening, FIs can avoid unintentionally facilitating illegal transactions.
If an FI accidentally breaches financial sanctions, it can face severe legal, monetary, and reputational consequences. However, given the increasingly complex nature of sanctions, ensuring regulatory compliance is no simple task. So what can FIs do to maintain sanctions screening compliance?
Jan Ulrych, our VP of Research & Education, recently addressed this question. Along with financial services leaders from Santander, Silicon Valley Bank, and SIX, he joined a webinar hosted by A-Team Insight, which explored the topic of adding value and improving efficiency in sanctions screening. While the discussion raised many thought-provoking points, we’ve broken it down into two key takeaways you need to know.
Takeaway #1: Sanctions Screening Is Becoming More Complex
The concept of a sanction has existed for centuries. However, economic sanctions did not gain prominence until the 1900s, when multiple countries made efforts to block Germany from the international economy during World War I.
During the 20th century, economic sanctions were generally country-oriented (e.g., one country would implement sanctions banning trade with another). In recent years, it has become more complicated. Targeted sanctions, also known as smart sanctions, are now aimed at specific individuals and entities. A recent example is the U.S. Treasury’s targeted sanctions against family members of Russian President Vladimir Putin in the wake of the Ukraine invasion.
New sanctions are issued every day, and FIs are expected to comply with them as soon as they emerge. “Sanctions can change on a daily basis, which makes it much harder to react quickly,” said Ulrych during the panel. He then emphasized the need for FIs to have a strong data lineage infrastructure to keep pace. “It is very likely that we will see more sanctions coming, and we can expect them to become increasingly targeted. Therefore, it is crucial to understand the data you are using [for sanctions screening], which requires complete visibility and transparency in your data environment.”
Implicit sanctions need to be accounted for, too. Implicit sanctions apply to entities that are not sanctioned by name and do not appear on a sanctions list. In the United States, the Office of Foreign Assets Control’s (OFAC) 50 Percent Rule states that if 50% or more of an entity is owned by someone subjected to a sanction, the entity is subject to that sanction as well. This further complicates regulatory compliance and emphasizes the need for a data lineage infrastructure that can keep up with new demands.
Takeaway #2: Data Environment Transparency Is Essential
To guarantee sanctions screening compliance in an increasingly complex regulatory environment, FIs must have two sets of data. The first is an explicit list of individuals, entities, and others that have sanctions against them. The second is a list of entities with implicit sanctions.
Using those datasets, FIs are expected to avoid conducting transactions, either directly or indirectly, with any entity subject to sanctions. But screening tools can only be as effective as the data passed through them. That’s where the need for data environment transparency becomes important. Complete data visibility—which can be accomplished with automated data lineage—translates to higher quality data, enabling increased transparency and trust.
While a manual screening approach may have worked in the past, it is simply not scalable to today’s sanctions environment. Rather, automated screening tools are the way forward. To be effective, such screening tools must be paired with highly visible, accurate, and complete data.
“It falls internally onto your data management and data governance practices to be able to both use data correctly and make sure that the data provided to sanctions screening tools is relevant and complete,” noted Ulrych. “For example, if you miss a recently acquired company that falls under the 50 Percent Rule, that is a huge compliance oversight.”
As the panel came to a close, Ulrych stressed the importance of data management and data environment transparency for sanctions compliance. “Clear visibility into the data environment and knowing what to do with your data to ensure quality before passing it to sanctions screening tools is critical.”