Money laundering is one of the most prevalent, lucrative, and dangerous crimes of the modern world. The numbers are staggering. The United Nations Office on Drugs and Crime (UNODC) estimates the costs of money laundering to the economy is around 2 - 5% of global GDP, ($800 billion - $2 trillion) every year. Banks are a prime conduit used by the fraudsters behind money laundering. This has resulted in the use of sanction lists as part of due diligence checks to reduce fraud.
Sanction lists, whilst helping to reduce money laundering and other financial fraud, have repercussions for banks. Research from the Office of Foreign Assets Control (OFAC) found that banks dealing with high volumes of global transactions are the most penalized when it came to non-compliance fines. These banks accounted for 98% of the total OFAC penalties over an 18 months period.
But fines are not the only concern for banks. Sanction screening also impacts the customer journey; False positives during sanction screening result in poor customer experience (CX) as this process adds friction.
Sanction screening is important to manage risk and prevent fraud but is there a way to reduce the issue of false positives and deliver a great CX?
Swings and Roundabouts: Compliance and Customers, Can You Keep Both Happy?
Sanction lists hold details of individuals, companies, countries, and groups. who for a variety of reasons, have sanctions applied. The lists are typically populated by governments and bodies such as the European Union, United Nations, and OFAC. Sanction lists are dynamic and change daily. Sanction screening must be used by all businesses, including banks, with screening enforced by regulatory bodies. When certain financial transactions are carried out, checks against financial sanction lists are performed. Banks are required by law to screen their clients against financial sanctions lists.
Sanction screening is an important part of keeping on top of the ever-growing threat of cyber-fraud. In the UK, for example, Suspicious Activity Reports (SARs) Annual Report for 2019 shows that fraudulent activity increased by 154% between 2018-2019.
Sanction lists show the broad nature of sanctioning. An example can be seen in the UK’s HM Treasury Office of Financial Sanctions Implementation, ‘asset freeze’ list; the list details countries, entities, and individuals, including details of misdemeanors and involvement in criminal activity.
One of the issues causing consternation in the banking industry is that in complying with sanction list screening regulations, false positives are generated. These cause a negative impact on customer experience. In addition, investigating issues caused during transactions is amplified by false positives; this is evidenced in a recent IBM study which showed that false positives are a major challenge in 40% of investigations:
Compliance and Sanction Fines
This fine balance between preventing financial fraud and meeting the compliance requirements of anti-money laundering is a challenge for banks. Fines for non-compliance with sanction screening continue unabated. OFAC fines in the last 10-years continue to impact banking. In 2019, UK banks were hit by $657 million worth of OFAC fines. In total, for 2019, there was around $1.3 billion worth of fines issued from OFAC for non-compliance.
Sanction list activity is enforced using regulations with a number of different compliance bodies overseeing this enforcement:
In the UK, enforcement is via HM Treasury Office of Financial Sanction Implementations (OFSI). A recent ruling saw Standard Chartered Bank (SCB) fined £20.47 million for breaches of financial sanctions.
In the U.S., enforcement is overseen by OFAC; recently the German bank, Unicredit Bank was fined around $1.3 billion. This fine was issued because of the bank enabling transactions to be carried out by sanctioned Iranian customers.
Across Europe, the European Commission offers a Financial Sanctions Database (FSF Platform).
Sanction lists are dynamic and large. If a bank handles large volumes of customer transactions the only way to quickly and easily query these lists is by using screening tools. It is at the level of the screening tool that false positives are experienced and where a conflict between meeting regulations and creating seamless and good customer experiences is seen.
Sanction List False Positives and a Poor Customer Experience
In recent years, banking has had to place a greater focus on the CX of its user base. The modern banking customer expects more. A 2019 report from Accenture “Global Financial Services Consumer Study” found that consumers increasingly want financial institutions to provide personalized services. This is putting increasing pressure on banks to perform to high standards of seamless transactions along with improved customer communications and interaction. False positives are a stumbling block in this process, adding in friction to a customer journey.
Banks are at a stage in the competitive landscape where the differentiator is based around the best CX possible. Anything that impacts this, affects competitive edge -- this is driving competition. This situation is evidenced in the 2020 Digital Banking Report which places customer experience central to digital transformation and a robust competitive strategy.
Banks must use sanction lists to meet regulations, but this is a challenge because they throw out false positives, interrupting user journeys, and losing customer trust in banking systems.
A pertinent example of how impactful this is on the customer is seen in a letter to OFAC from a man called Stephen Law. Mr. Law shares his name with another Stephen Law who is on the sanction list. The letter details all of the issues caused by his own transactions throwing up false positives, Mr. Law at one point mentions that amongst many other problems, the false positives:
“caused delays to payments to me that can run into weeks. On one occasion I ran up overdraft charges as a result of not receiving funds blocked by OFAC.”
Smart Sanction Screening to Reduce False Positives
Banks must walk a fine balance between meeting the requirements of sanction screening regulations and ensuring customers have a great experience. How to meet this compliance and retain a competitive CX by keeping false positives to a minimum, is the question here.
Below, are detailed some ways that a bank can keep false positives to a minimum to allow them to work on perfecting their customer experience:
In the first instance, an effective Financial Crime Compliance program (FCC) should drive your data-driven/risk-based screening. A December 2019 Standard Chartered Bank review of ‘lessons learned’ points out this:
“Across the industry, we remain challenged by excessive false positive alert rates and spend too much time documenting why something is not suspicious rather than on detecting or preventing financial crime. ...by capturing and analysing more data about our processes, we can start to build a better picture of what works, learning from the millions of false alerts being processed each year. New technology can help identify and differentiate between things that are truly interesting from a risk perspective and automatically process and address alerts that are not worth presenting to an investigator, allowing investigators to focus their time and effort on higher value work…”
The use of new technology as Standard Chartered points out can help to alleviate the challenges inherent in false positives when using sanction list screening. These technologies include:
AI and Machine learning-based systems: According to reports, traditional Transaction Monitoring Systems (TMS) can result in false positive generation during AML checks as high as 90%+. Each false positive generates an alert which has to be investigated. The phenomenon of alert fatigue is a well-known issue in the industry. Traditional systems are static and rules based. They are often dogged by incomplete and fragmented data, some of this caused by mergers and acquisitions. This fluid nature of sanction list data adds to this, complicating an already messy AML landscape. The use of Artificial Intelligence-based, aka Machine Learning, advanced analytics, helps to reduce false positives. Machine Learning is used in sanction screening to spot patterns and trends, removing the need to manually review every false alert. In addition, options such as “fuzzy matching” provide the mechanism to tease out the issues around misspelled names and other naming variations that can result in the issues as seen by Stephen Law. The self-learning aspects of an AI-approach to sanction screening provides the template to reduce false alerts.
Blockchain solutions: Sanction lists are dynamic and continuously updated. This is one of the reasons behind sub-optimal AML checks based on sanction lists. For sanction lists to be effective and accurate they need to be optimized by automating updates. Solutions that provide this functionality can use blockchain technology. Automated revisions of sanction lists reduce human error and fraud, and in doing so, reduce false positives.
Banks have to deal with a complex matrix of pressures around money laundering. The banks must use sanction lists to comply with regulations to reduce fraud. In doing so, false positives cause fraud investigators to suffer from alert fatigue and they also impact the customer experience. To push forward with compliance, keep customers happy, and reduce fraud, banks must turn to more fit-for-purpose technological solutions. In the data-driven world of sanction screening, banks must use the right mix of tools for the job; improved accuracy of sanction lists and reduction of false positives can be achieved by using a combination of tools. This combination comprises a sanction screening solution based on Machine Learning to reduce false positives, coupled with a blockchain solution to update sanction lists using automation.