As financial institutions (FIs) face the dual challenges of increasing financial crime and evolving regulations, the importance of effective sanctions screening has never been greater. Legal mandates require these institutions to identify and prevent transactions involving individuals or entities on sanction lists. The repercussions of non-compliance can be severe, ranging from heavy fines to reputational damage and the loss of banking licenses.

 

The Challenge of Sanctions Compliance

The sheer volume and diversity of global transactions complicate the task of ensuring sanctions compliance. As noted by Siiri Grabbi, Sanctions and Counter-Terrorism Financing Officer at Coop Pank AS and senior representative from the Estonian Banking Association, the constantly shifting political landscape and frequent updates to sanctions lists exacerbate this complexity. With estimates suggesting that between 90% and 99% of matches against these lists yield false positives, FIs have found it necessary to enhance their compliance resources significantly.

Understanding the complexities of each sanction list, many of which are updated weekly, is crucial for effective sanctions screening. Leonard Werner, Senior Solutions Consultant for Sanctions Screening at Bottomline, emphasises the need for FIs to continuously collaborate with trusted third-party providers and invest in technology that can handle these demands. Coordinated efforts can help mitigate risks associated with potential violations.

 
ISO 20022: A Game-Changer for Sanctions Screening

Introducing the ISO 20022 standard for financial messaging represents a transformative development for sanctions screening. Previously, unstructured data and free-text fields created hurdles for screening systems when matching names, addresses, and entity identifiers. ISO 20022 rectifies this by providing clearly segmented fields for names, addresses, and country data, which leads to higher match accuracy with sanctions lists. However, challenges persist, particularly in name matching, as issues such as transliteration still exist with this new standard.

Grabbi notes that most banks in Estonia adopted ISO 20022 natively last year, but spelling variations within the EU's 24 different languages can complicate compliance. Standardised country names and field criteria are vital to reduce discrepancies and improve the efficacy of sanctions screening processes. Stakeholders, including those responsible for creating sanctions lists and global banking associations, should work together to develop a comprehensive rulebook and glossary of terms to facilitate consistency across the industry.

As banks strive to reduce friction in payments as part of the G20 Cross-Border Roadmap for 2027, the structured data fields provided by ISO 20022 can clarify identifiers such as geographical designations (e.g., distinguishing a business based in the UK rather than Cuba), thus helping to avoid unnecessary false positives.

 
Poll Insights: Benefits of SaaS for Sanction Screening

In a recent Bottomline webinar poll, 57% of industry professionals identified ‘scalability’ as by far the most significant benefit of using Software as a Service (SaaS) for sanctions screening.

Werner advocates that SaaS reduces complexity for banks, allowing quicker implementations and easier maintenance. However, there are concerns about regulatory compliance, particularly regarding data residency requirements in certain jurisdictions. Grabbi concurs, stating that while SaaS solutions provide agility and help keep up with new regulations, some supervisory authorities still expect traditional on-premise solutions due to concerns over data security.

 
Next Steps in Sanctions Screening

Looking ahead, Grabbi emphasises that the focus should be on how sanctions regulations will evolve. As directives from supervisory authorities increase, especially concerning comprehensive wallet screening, institutions must reassess their current systems to ensure compliance with these expectations and standards.

Werner offers a concrete example of the importance of operational agility, referencing how Bottomline supported Mongolian banks affected by EU and Swift sanctions against Russia. Bottomline offered an alternative solution via their service bureau in Singapore, showcasing the critical role of adaptability in maintaining compliance amid regulatory pressures.

Both experts express concern over potential manipulations of anti-money laundering (AML) regulations, warning that if any jurisdiction abuses standards, it could jeopardise the entire system. They also emphasise the importance of collaborative vigilance in an increasingly complex financial landscape.

 
Conclusion

As financial institutions navigate the intricate webs of global sanctions, the integration of advanced technologies alongside human expertise will be vital for successful screening practices. Investments in standardised data communication, coupled with strategic partnerships and collaboration within the industry, are essential to stay compliant in an environment where regulations and sanctions evolve rapidly. Ultimately, the future of sanctions screening will depend on harmonising technological capabilities with the nuanced understanding that only human professionals can provide.

Click here to watch the webinar “Efficiently Screen Transactions to Identify and Mitigate Sanctions Risk” in full.