The global risk landscape has never been more complex. With the war in Ukraine triggering a wave of sanctions against Russia, sanctions activity reached record heights in the first half of 2022 – the importance of proactive risk management cannot be overstated.
With over two decades of experience in financial services, Dalbir Sahota, a seasoned executive, leads product management transformation at LexisNexis® Risk Solutions. In this article, he delves into the mounting challenges posed by a shifting sanctions landscape on payment processes.
Lists maintained by the four key regulators – the United Nations (UN), European Union (EU), Office of Foreign Assets Control (OFAC), and the Office of Financial Sanctions Implementation (OFSI – UK) changed constantly, with entities added, deleted and modified at an unprecedented pace.
Although the number of updates for the first half of 2023 is down by 31 per cent, sanctions activity remains at historical highs, and is likely to continue for the foreseeable future.
All this activity puts pressure on firms to find new and better ways to safeguard the payment process. Banks and other organisations conduct sanctions screening to comply with anti-money laundering/countering the financing of terrorism (AML/CFT) regulations. While sanctions change constantly, the regulatory requirement to screen for sanctions remains steadfast. Doing business with a sanctioned bank or other sanctioned entity puts every participant in the payments chain at risk.
Automation that identifies sanctions early saves time and improves customer experience
Keeping pace with ongoing changes to sanctions lists is a considerable challenge for all organisations, but the cost of non-compliance is steep. Globally, sanctions violations and anti-money laundering and know your customer (KYC) compliance issues cost financial institutions nearly $5billion in 2022, according to the Financial Times. That’s a 50 per cent increase over the previous year.
Although the initial sting of a fine or financial penalty for non-compliance may be painful – and trigger increased regulatory scrutiny and onerous ongoing audits – the reputational damage caused by such a lapse can be even more detrimental and long-lasting. Screening for sanctions early in the payments process provides an important layer of defense that strengthens compliance, saves time, and reduces friction for the customer.
Greater control through early identification
To keep pace with changing sanctions, ensure compliance, and prevent payment delays, organisations should consider technology that provides greater control over sanctions screening earlier in the payment process.
Several technology solutions are available to instantly validate customer-entered account details to ensure payments are routed to the correct account holder. They typically alert the payer in the event of an error, so changes can be made before the payment is sent to the bank. However, these systems do not check for sanctioned banks.
Screening for sanctioned banks before initiating payment to the payee offers numerous benefits to all participants in the payments chain. In addition to reducing repairs and costly failed payments, saving time, and improving straight-through processing rates; early sanctions screening provides a smoother customer experience with fewer processing delays. Most importantly, early screening delivers an additional layer of security that strengthens compliance. When combined with accurate, up-to-date data, early screening also enables organisations to automate payments with confidence.
Everyone benefits from early sanctions screening
At most organisations, the payments process from sender (‘payer’) to recipient (‘payee’) leaves the sanctions ‘door’ constantly open, exposing banks, payment service providers (PSPs) and businesses to risk when sending or receiving payments.
Typically, the payer organisation checks customer-entered information against payments data requirements (e.g., bank name, IBAN number) and corrects errors before the payment is initiated. Screening for sanctions occurs later in the payments process – after the validated payment is sent to the bank. If the bank then identifies a sanctioned entity, the payment cannot be executed and is returned to the payer for further action, slowing the payments process. By contrast, the new technology identifies the sanctioned entity before the payment leaves the payer, saving time and expense.
This improved process benefits all participants in the payments chain:
- Banks can offer improved customer/remitter experience by incorporating sanctioned bank warnings into payments channels, such as mobile banking. In addition, earlier detection reduces the burden on operations professionals who would otherwise need to remediate alerts and manage customer frustration when funds sent to sanctioned banks are quarantined.
- PSPs can avoid returned payments by warning customers in real time that the bank they plan to send money to is sanctioned.
- Corporates can perform real-time screening before sending payment instructions, which reduces the likelihood of blocked payments and subsequent costly operational corrections.
How costly are failed or stopped payments? In 2020, an estimated $118.5 billion was lost to failed payments globally. But it is not just lost revenue that is concerning, failed payments negatively impact the customer experience and can threaten the entire relationship. With more than 70 per cent of organisations indicating that they are not satisfied with their payment failure rate, it not surprising that reducing failed payments and boosting straight-through processing are a high priority.
LexisNexis® Bankers Almanac® Validate™ has recently added sanctions screening to its arsenal. In addition to instantly verifying domestic and international payment information and driving automation wherever it is needed in the payments flow, organisations can now also see if the bank to be paid is sanctioned – empowering organisations and their customers to cease payment at the point of initiation.
With data updated daily from OFAC, EU and UN sanctions lists, organisations can reliably increase compliance posture in a way that complements existing financial crime compliance controls and improves customer experience.
Looking toward the future
The brisk sanctions activity these past 18 months may very well be the new normal. Taking steps now to ensure payment systems and processes can meet the demands of this challenging landscape with its changing political pressures and increasingly complex regulatory environment makes smart business sense.
Screening solutions that enable organisations to instantly check for sanctioned banks before initiating payment to the payee offer an early line of defence to preemptively identify sanctions risk in the payments flow, all while improving customer experience.