Introduction

As financial crime evolves, the debate over whether banks and other financial institutions should pursue advanced technologies like artificial intelligence and machine learning to drive sanctions compliance has shifted from “if” to “when, how, and on what scale?”

Even regulators who have historically shied away from embracing technology are now advocating for organizations to use new tools to meet their regulatory obligations. And organizations like The Wolfsberg Group have concluded that “technology remains a key enabler in the effectiveness of identifying financial crime risk through screening, more efficiently and on a real-time basis.”

Technology remains a key enabler in the effectiveness of identifying financial crime risk through screening, more efficiently and on a real-time basis.

—The Wolfsberg Group

What are your challenges in sanctions operations?

Rising volumes
High costs
Understaffing
Identifying true hits

Last year, sanctions screening became increasingly more complicated for banks and financial institutions (FIs). In the days following Russia’s February 2022 invasion of Ukraine, the U.S., U.K, Australia, and EU-member governments began imposing a coordinated set of financial sanctions against Russia and Russian nationals to limit trade, penalize oligarchs, and cripple Russia’s economy.

Sanctions tranches have continuously been released since February of 2022. This has presented serious operational risks to financial institutions (FIs). As soon as they could get a handle on each new set of sanctions, even newer ones would be issued. This made a bad situation even worse for FIs. Prior to 2022, financial crime teams within banks and financial institutions were already overburdened, overstressed, and under-motivated. Once the war began, these stressors were compounded tenfold.

Despite the exacerbated compliance challenges for FIs, regulators have become unyielding in their efforts to enforce anti-money laundering compliance regulations. In fact, they have ramped up enforcement efforts and shown a willingness to heavily penalize organizations – via fines and extensive outside audits – with the purpose of driving down AML program deficiencies across the industry.

For example, on January 28, 2023, the White House published The Administration’s Roadmap to Mitigate Cryptocurrencies’ Risks. The roadmap specifically calls for regulators to “ramp up enforcement.” This follows the April 2022 proclamation by Britain’s Financial Conduct Authority (FCA) which states that “Ensuring the firms we regulate are effective in preventing financial crime, such as money laundering and sanctions evasion, remains a key priority.”

Figure 1: The breadth of AML compliance enforcement actions

Sanctions pose major operational risks to FIs

From Neobanks and FinTechs, to crypto firms and traditional banks, the ever-increasing volume of sanctions presents a series of operational risks. Four common risk factors include the following:

#1: Cyclicality of sanctions

#2: Elevated sanctions response costs

#3: Insufficient number of FinCrime analyst staff

#4: Inability to pinpoint ‘true hits’ among huge alert volumes