An interactive view on sanction screening challenges
In April 2019, Zanders has organized a breakfast session on sanction screening. We were happy to welcome over 20 professionals from a variety of multinational corporates who actively shared their experiences with sanction screenings. Several aspects of the process and related issues were discussed.
Why does sanction screening need the attention of the corporate?
There are differing motivations for corporates to focus on sanction screening within their organization. Sanction lists are complex as they do not simply list entities, countries or individuals that are being sanctioned. In many cases, the sanctions refer to the specific combination of country/product/entity and there are also exceptions for such combinations. For example, trading in food is an exception to the sanctions for most of the countries. For this reason, the regulatory requirements are, in many cases, not relevant for corporates operating in the food industry. While regulatory compliance seems like an obvious motivation, most of the attendees mention financing agreements and mitigating reputational risk as the main drivers behind their sanction screening activities.
Interestingly, the sanction screening stipulations laid down in financing agreements are often stricter than the regulatory requirements. Sanction screening stipulations embedded in the bank covenant requirements will also vary across banks and countries, which adds further complexity to comply with them. Many of the breakfast session’s attendees experience an increased number of questions coming from banks. These questions are not only related to payments, but also include queries with regards to processes and procedures within the organization. Implementing a solid and auditable process for sanction screening can help minimize the inquires coming from banks as part of their KYC process. It was mentioned that when the bank is confident that their corporate customer has a robust sanction screening process in place, they will rate this client as a lower risk client. This should have a positive effect on the corporate’s relationship with the bank and limit the incoming questions.
Sanction screening is often driven or initiated by compliance, but treasury frequently plays an important role too. Treasury can be involved in the onboarding of new customers for the sanction screening process. When there is an onboarding of a new client, treasury can check whether the flows with this entity will be accepted by the banks.
Why should a corporate adopt a tool for the sanction screening process?
There is an increasing number of sanctions lists from numerous governmental and regulatory bodies. Moreover, technology is enabling sanctioned entities to become more sophisticated and leverage emerging tools and new channels to evade traditional controls and oversight. Ideally, sanction screening should be an end-to-end process where screens are executed several times: during onboarding of the new client/supplier, check on the master data, at invoice entry, and checks on the payment files before the payments are send to the bank.
The intelligent sanction screening tool enables such standardized and automated end-to-end execution of the process. This allows the sanctioned entity to be detected early in the process and an investigation can be carried out in an optimized way. Most of the corporate professionals present in the room acknowledged that they only perform sanctions screens on the payments, which can be seen as too late in the process.
Another advantage of the sanctions tooling is the documentation it produces on the follow-up investigation into positive hits generated by the screening tool. This documentation is readily available and can be provided to internal audit or a bank even before the inquiry comes, which can help in minimizing blocked/delay payments. An increasing number of tools available on the market use machine learning. This can substantially minimize the amount of false positive hits and considerably streamline the sanction screening process.
What is the experience with the sanction screening tool?
Confirming the survey results executed by Zanders last year, less than 50% of the Breakfast Session attendees use tooling for their sanction screening process. Two of the guest speakers at the session shared a more detailed experience of their sanction screening tooling. Bas Duynisveld (Manager Business Treasury EMEA & North America) from Akzo Nobel N.V. shared his experience with Finastra, which performs sanction screens on outgoing payments. Louise Vytopil (Senior Counsel Business Conduct) from Royal FrieslandCampina N.V. shared her experience with Finscan. Both guest speakers were happy with their respective solutions in terms of both performance and implementation. They noted, however, that the people aspect and data management process are key factors that determine the success of such a project.
It is often the case that the master data is not entered correctly or fully as part of the vendor onboarding process, for example. All attendees at the session agreed that master data governance is the starting point for the adoption of the sanction screening tooling. Likewise, everybody agreed that the centralization of the master data is very beneficial to the overall sanction screening process and well as to the implementation of the tooling.
Implementation of the sanction tooling also has an enormous impact on day-to-day work processes that are not directly related to screening. This can prolong implementation timelines and adds some complexity. As mentioned by Louise Vytopil, the technical installation of the tool can be as short as 8 weeks, while implementation of the related organizational and process change can take up to 12 months.
What is an optimal sanction screening tool?
We have shared our overview of the available tooling on the market with scoring on multiple features. This system overview is the result of market research, including vendors’ demo sessions, carried out by Zanders in 2018.
There are several features that constitute a robust sanction screening tool. First, screens are executed at multiple layers as previously outlined (onboarding, master data, invoice entry, payment settlement). Second, the screens should be executed as close to real-time as possible. Currently this is not a feasible feature for the ‘affordable’ tools available to corporates. However, screens should be done on daily basis as a minimum standard. Machine learning is another desirable feature that enhances the sanction screening process and minimizes efforts required in the investigation of the false positives. It is also important that the system has flexibility to incorporate black and white lists. Black lists can be used to list the entities a company does not want to pay/receive money to/from that are not on the official sanctions lists. The entities that are not allowed by banks can also be added here. White lists can be used to list the entities that went through the due diligence process and were identified as ok to pay/receive money to/from. Lastly, the optimal system will provide good case management and reporting functionalities.
While some systems can be generally classified as better than others, the optimal solution will always depend on the technological landscape of the corporate. The goal is to integrate the sanction screening tool with all relevant corporate systems to achieve an automated process. Therefore, it is critical to assess and understand the technological infrastructure of your company before you select a solution. Additionally, the market of sanction screening solutions is evolving rapidly.
What is the biggest issue in sanction screening?
It was concluded that today’s available technology can optimally support the screening process on the ongoing flow. It was also quickly concluded that it is a corporate’s responsibility to screen outgoing payments and stop the payment files when necessary. On the other hand, there was some heated debate about the screening of incoming flows. This seems to be somewhat a more sensitive topic which represents a significant challenge to many attendees of the session. In essence, direct debits are also subject to sanctions regulation and therefore should be screened as well. While stopping an outgoing payment is an acceptable practice, it doesn’t seem to be a straightforward choice for the receipt of funds.
Today’s sanction screening could best support the sanctions checks on incoming flows as part of the master data management process. When suspicious payments are coming from a known third party, it is easier to explain the acceptance of such payments to the banks or regulators. The bigger problem is when the payment comes from an unknown entity. Nevertheless, incoming payments from third parties that are not recognized in the master data seem to remain an issue for the sanction screening process. The consensus view is that corporates are reluctant to stop incoming payments.