A Guide to Anti-Money Laundering for Crypto Firms
Common Challenges Organizations Face when it comes to
Global sanctions are an indispensable foreign policy tool, helping governments achieve diplomatic and political objectives in every part of the world, and respond to violations of international law, including human rights crimes. In implementing their global sanctions programs, governments make new designations constantly, introducing strict and often complex compliance requirements on firms within their jurisdiction.
Global sanctions compliance is an important priority for banks and financial institutions and represents a significant anti-money laundering (AML) challenge. Firms must ensure that they do not – knowingly or unknowingly – provide sanctions targets with opportunities to evade the economic restrictions against them by screening customers and transactions against the relevant international sanctions lists. Accordingly, firms must develop and implement a sanctions solution, as part of their AML infrastructure, that is capable of managing sanctions compliance challenges and ensuring that they detect and prevent sanctions violations quickly.
Given the importance of global sanctions compliance and the potential regulatory penalties that noncompliance entails, firms must ensure that their screening solution is implemented in a way that reflects their risk landscape. Effective screening solutions should be accurate enough to detect threats but not so rigorous that they degrade the customer experience, or so sensitive that they create an unmanageable amount of false positive alerts.
With that in mind, let’s take a closer at the key compliance issues associated with global sanctions:
The global sanctions landscape is constantly changing as geopolitical events see names added to, and withdrawn from, sanctions lists in different jurisdictions. During the Trump administration (2017 to 2021), for example, the US government made a record 3,900 sanctions designations, including the reintroduction of sanctions against Iran after its withdrawal from the Joint Comprehensive Plan of Action (JCPOA). Given the pace of that change, it is vital that a screening solution delivers real-time data and updates so that firms can be confident in the accuracy of their sanctions checks.
To manage the administrative burden of sanctions compliance, it is important that a screening solution delivers relevant results. In practice, this means that compliance teams should understand which international sanctions lists they are required to screen against and how those sanctions apply to the names designated. In the UK for example, firms must screen against the UK’s autonomous sanctions list, and against the UN sanctions list (although numerous names are designated on both lists). A screening solution that is calibrated too broadly will generate a higher amount of false positive results, which will cost time and resources to remediate. By contrast, screening too narrowly risks missing important sanctions designations and incurring compliance penalties.
Firms must understand the level of sanctions risk they face and adjust their compliance response accordingly. Customers from (or transactions involving) high risk jurisdictions, such as Iran, Venezuela, Russia, or North Korea, present an elevated compliance risk and should be subject to more intensive Know Your Customer (KYC) measures in order to accurately establish their sanctions status. Certain sectors also present higher sanctions risks: correspondent banking or shipping businesses, for example, require firms to rely more heavily on third-party KYC which may represent an AML vulnerability.
The global sanctions landscape is complex and diverse and there is no ‘one size fits all’ screening solution. With that in mind, it is important that firms understand their own compliance objectives and obligations, and the various processes they need to implement to fulfil them. Firms should carefully consider their internal sanctions controls and policy, from understanding the technology used to generate sanctions alerts, to reporting potential breaches to the authorities. Screening solutions should also be subject to regular internal and external audits in order to identify any developing weaknesses or blindspots.
Aliases, Nicknames, Spellings
International sanctions lists contain thousands of name designations, often with very similar spellings, while sanctions targets may often conduct business using an alias or nickname. Screening solutions must be able to capture the nuances of customer name spellings in order to avoid duplicate and false positive alerts and be confidently informed with relevant data pertaining to known aliases or nicknames.
Non-Western Naming Conventions
Global sanctions screening solutions must be able to capture a broad range of non-Western naming conventions. Many Middle Eastern names, for example, use a variety of suffixes for ‘God’ that follow first names, while some East Asian cultures traditionally arrange the surname before the ‘first’ name. Screening solutions should also take into account the use of non-Latinate characters. such as Arabic and Mandarin, and the idiomatic use of vowels and contractions.
One of the most significant recent challenges on the global sanctions compliance landscape, is the application of secondary sanctions – and the reintroduction of blocking rules in response. Secondary sanctions, such as those imposed by the US against Iran, prohibit third countries from engaging in trade with sanctions targets that have been designated by other countries. In the case of the US sanctions program, secondary sanctions compel non-US persons to apply US-issued trade restrictions against Iran at the risk of being sanctioned by the US themselves. Secondary sanctions add to the compliance burden: firms must check not only the sanctions lists that apply in their home jurisdiction, but a range of relevant third-country sanctions lists, such as the OFAC sanctions list.
As a response to the increased use of secondary sanctions, some jurisdictions have introduced blocking rules that essentially prohibit firms from complying with secondary sanctions at the risk of incurring penalty fines. In 2021, China introduced blocking rules to counter the secondary application of US Iran and North Korea sanctions on Chinese firms, while the EU reintroduced its own blocking statutes in 2018 following the US’ withdrawal from the JCPOA.
While the challenges of global sanctions compliance present differently for every firm, a common factor is the requirement to collect and process vast amounts of customer data. The manual processing of sanctions data can be slow, costly, and involve the ongoing risk of human error. Similarly, remediation challenges can delay the onboarding and transaction monitoring processes creating a range of friction points for both customers and compliance teams.
Accordingly, firms should implement a solution that meets the specific demands of their risk environment. ComplyAdvantage’s sanctions screening solution is built around versatility and accuracy, offering firms the capability to screen customers against a wide range of sanctions data in near real-time – including over 100 international and national sanctions lists and thousands of government and law enforcement watchlists.
Our sanctions screening solution is informed by a variety of AML KYC measures and designed to help firms build accurate risk assessments, enrich their sanctions data, and minimize false positives. Those measures include:
- Customer due diligence: Firms must be able to accurately identify and verify their customers, or the beneficial ownership of customer-entities, in order to match them against names designated on sanctions lists.
- Transaction monitoring: Firms should be able to effectively monitor for transactions involving sanctions targets, or unusual financial activities that are indicative of attempts to avoid sanctions restrictions.
- PEP screening: AML solutions should be able to identify politically exposed persons (PEP) that might pose a greater sanctions compliance risk as a result of their proximity to government or elected office.
- Adverse media monitoring: Customers that are the subject of adverse or negative media stories may pose a greater sanctions compliance risk. Firms should screen a variety of news media for adverse stories, including screen, print, and online sources.
Beyond its automated speed, scope, and accuracy advantages, our screening solution also incorporates innovative name-matching technology to help eliminate costly false positive alerts and, worse, false negatives, and is configurable to reflect our clients’ unique risk appetites.
To learn more about sanctions around the world, view our latest report.
Disclaimer: This is for general information only. The information presented does not constitute legal advice. ComplyAdvantage accepts no responsibility for any information contained herein and disclaims and excludes any liability in respect of the contents or for action taken based on this information.
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