Delivering effective sanctions screening amid growing FCA concerns

Finextra recently reported that many of those in financial services were found wanting with their sanctions screening efforts by the Financial Conduct Authority (FCA). 

After a survey of sanctions controls at 90 firms the FCA uncovered deficiencies across staffing, technology and reporting networks, leading to a lack of adequate resources to ensure effective sanctions screening. The study also found flaws in customer due diligence (CDD) and know your customer (KYC) procedures.

This is concerning, particularly with the large number of sanctions enacted since the start of the war in Ukraine, alongside more recent conflicts, such as the one in Sudan.

Those in financial services who don’t adhere to current regulations on sanctions screening will see fraudsters and money launderers slipping through the net, leading to potentially big fines and long term damage to their reputation.

Why are there these issues with sanctions controls? Sanctions screening is still viewed by many financial institutions as a tick box exercise. This means they are not investing in the resources they need to effectively meet regulatory requirements, but also those of their wider organisation when it comes to such screening.

Up-to-date sanctions lists

The best place to start to ensure that you are up to speed with the latest sanctions data, and also regulations, is by having access to an up-to-date sanctions list. While this may seem obvious it’s surprising how many don’t have access to one.

Such a list should be accessed as part of an automated tool that collects and synthesises sanctions data from a wide range of trusted sources worldwide, such as governments, regulators, and credit agencies. Additionally, it needs to continually scan for updates on sanctions data and deliver them in real-time.

This automated approach is a much more efficient and accurate way to implement sanctions screening. The other route, usually manual checks using search engines, could expose your organisation to sanctions breaches and the associated cost in fines and to your reputation; quite apart for the considerable cost of employing staff to carry out such checks.

PEP and RCA checks

It’s not enough to have an up-to-date list of those who have been sanctioned. Those in financial services need to screen against politically exposed persons (PEPs) and relatives and close associates (RCAs) of PEPs from around the world, because there’s a tendency for these groups to be involved in or drawn into crime. In the UK, financial organisations are legally obliged to deliver enhanced checks of both domestic and foreign PEPs.

Adverse media checks 

Adverse media screening is critical for both customer due diligence (CDD) and enhanced due diligence (EDD), to ensure know your customer (KYC) and anti-money laundering (AML) regulations are met. This makes it essential to acquire adverse media screening technology that enables you to stay up to date on the latest news and alerts, in real-time, on any arrests or court cases, for example, against your customers who may be PEPs and RCAs, and others who could have potential negative regulatory, financial, or reputational consequences to your organisation.

Obtain adverse media screening services that can scan the credible global news media for maximum reach. This allows compliance teams to remain up to date on any new information regarding the status of those using their products and services, with customers with negative news against them ranked as high risk, and requiring further due diligence which may result in ending the relationship.

Technology ready?

Identifying those who have been sanctioned is only half the battle. The next stage requires having procedures in place to immediately act on this information. This requires ensuring systems and controls related to your organisation’s onboarding and payment screening platforms are able to act on those who have been sanctioned. Once these individuals have been identified in your database, make sure you have the systems in place to block transactions and swiftly freeze funds.

Train compliance teams

Undertake appropriate training for compliance staff who are on the front line when it comes to acting on the sanctions data. As well as having a clear understanding of the latest sanctions measures, they also need to know how to handle those individuals that are impacted by the sanctions, so everything is handled correctly.

Integrated eIDV service

It’s important to understand that there are electronic ID verification (eIDV) services available that not only have access to comprehensive sanctions data, including those on PEPs and RCAs, but are able to cross-check user-provided details against reputable data streams to ensure individuals are who they say they are in real-time. Using tools such as these, which have everything ID check related integrated in one place, will not only have cost benefits in terms of scale, but ensures those in financial services are well placed prevent fraud and meet their regulatory requirements as set out by the likes of the FCA.

With the FCA identifying a deficiency in sanctions screening this is an area they will no doubt be paying close attention to in the future. This requires financial organisations to step-up and ensure that their sanctions screening is appropriate for their needs and those of the regulators, and they also have effective wider KYC procedures in place over the long term. An increase in fraudulent activity, falling foul of the FCA and tarnishing their reputation are the risks facing those that don’t take this approach.