As we enter the second half of the year, one marked by increasing global conflict, looming regulatory updates, an impending presidential election, and evolving attitudes toward technology, sanctions compliance has never been more important, and it is especially a focus in the United States.
What are the new US sanctions regulations?
The United States, in coordination with the G7 and international partners, has intensified its sanctions and economic measures against Russia to weaken its capacity to wage war against Ukraine over the past year. Office of Foreign Assets Control (OFAC) is implementing new sanctions targeting individuals and entities involved in circumventing these restrictions and providing support to Russia's military efforts.
In May of 2024, President Biden signed the H.R. 815 Bill. This has significant implications for international trade laws, particularly extending the statute of limitations for economic sanctions and export control violations from five to ten years. This development affects both mergers and acquisitions (M&A), due diligence processes and operational compliance strategies within companies. The Bill also imposes additional sanctions on Russia, Iran and Hamas. Most importantly, regulators and prosecutors now have double the amount of time to investigate sanctions violations.
How can financial institutions prepare for increased sanctions screening scrutiny?
Financial institutions (FIs) in the US will have to review their sanctions compliance programmes, in line with the new regulations.
This includes:
- Maintaining records for ten years: OFAC currently requires that record keeping of transactions is kept for five years. Currently, this is not expected to extend to ten years, but FIs should keep this in mind and make sure their records are being kept in line with OFAC’s policies and prepare for future adjustments.
- Increased due diligence: Customer due diligence (CDD) data should be held for longer than five years, and FIs should double down on more effective CDD processes.
How can technology aid sanctions compliance in the US?
In 2020, the FinCEN files investigation found that transactions through US-based banks allowed over $2 trillion USD in suspicious transactions to flow internationally. And in 2022, credit and financial institutions were fined almost $5 billion USD for anti-money laundering (AML) issues, sanctions breaches and deficiencies in their know your customer (KYC) systems. Not only are the sanctions compliance pressures mounting in 2024, but bad actors are now using advanced techniques to obscure the illegal source of funds. Alongside the fines, many banks’ legacy systems are unable to meet their regulatory needs in 2024.
Transaction due diligence will become ever more important to meeting the US’ requirements. Manual processes at initial onboarding and throughout the customer lifecycle make it impossible to understand underlying risks, and more effective client screening is needed.
- Contextual name matching: Financial institutions should look to leverage sophisticated name matching engines that can be tuned more accurately to cover all the cultural contexts in which a bank transacts. This includes capabilities to match name variations from phonetic similarity and transliteration to nicknames.
- Multi configuration screening: It is important that technology supports multiple configurations of screening strategies to enable an optimal risk-based approach to meeting regulatory requirements across jurisdictions.
A multi-org deployment builds upon system security as a priority, removing technological and operational risk by giving organisations full control to designate permissions, access data, and manage workflows within its business units.
- Low-code sandbox: Low-code solutions mean the team can configure dashboards and views, without the need for internal data scientists for every change. A sandbox is an environment that provides compliance officers a controlled and isolated space for testing and developing customised rules in their anti-money laundering (AML) systems. Integrated sandboxes enable FIs to respond to unanticipated changes and conduct regular testing to plan for all eventualities.
- Explainable AI: We continue to hear the promise of AI, but it shouldn’t be implemented for compliance’s sake. To truly trust and understand the alerts generated by AI systems, compliance professionals should have explainable AI providing visibility into the algorithms' decision-making processes.
Global regulators are now issuing guidance around the adoption of AI for financial crime compliance. Any AI should be used to inform a decision made by a human.
Implementing the right technology to meet sanctions requirements can help achieve compliance, without costing financial institutions billions of dollars in fines or operations.
Learn more about Sharpening Sanctions Compliance with NextGen Client Screening in the midst of US regulatory change in our latest whitepaper.
Photo by Simon Launay on Unsplash
