Steering clear of officially sanctioned assets requires a lot more than just recognising the names of targeted persons and getting the client on-boarding right. Oliver Bodmer, senior product manager at SIX, looks at the need for continuous monitoring.
When the Titanic left for its maiden voyage, it took to the open seas missing one crucial asset: the key to the locker containing binoculars for the crow’s nest lookout. So for all the crew’s efforts, squinting into the distance as the ship ploughed onwards, they were too late to spot the enormous iceberg that would fate the ship to sink.
With the recent April anniversary of the Titanic’s demise, this story is an important lesson for businesses facing similarly sizeable sanctions risks in the pre-trade environment.
Crossing the Atlantic
Thanks to the rise of mobile and internet banking, firms are facing larger volumes of transactions than ever before, and the increasingly global scale of trading means banking services must be available round-the-clock.
While monitoring outgoing transactions might be manageable, it can be more difficult to maintain oversight of incoming transactions that could be originating from any number of questionable sources. This is where dangerous transactions can slip through the cracks and firms may accidentally find themselves trading with sanctioned entities.
Like crossing the Atlantic, it’s a mammoth challenge to oversee and ensure all transactions comply with the rising tide of global sanctions.
All hands on deck
To deal with this growing demand as well as intense regulatory pressure, firms have increased their spend on compliance by putting more people on deck. The trouble is that very little is improving. In fact, with the recent spate of high profile banks implicated in money laundering scandals, it seems to be getting worse.
This is because, in reality, it is an impossible task for banks to be able to manually monitor all transactions in a comprehensive way, no matter the people thrown at the task. There are simply too many transactions taking place, and the bad guys are always a few steps ahead.
In short, the reason so many teams of manual compliance officers are failing is because they are really only seeing the tip of the iceberg. The people or companies who are personally named, like Russian oligarch Oleg Deripaska as a recent example, are easy to find, but it’s everything that they own that is hiding beneath the surface, ready to catch banks out.
The right binoculars
At SIX, we provide the right binoculars for banks to spot and calculate risk in the pre-trade environment both above and below the service. This comes in the form of our Sanctioned Securities Monitoring Service (SSMS).
Where traditional Know Your Customer (KYC) compliance tools address the risks present in the on-boarding process, SSMS continuously monitors for changes throughout the relationship, including shifts in ownership and the sudden lifting of sanctions. So while KYC compliance is an important first step for firms, it really just provides an initial glance of the turbulent sanctions landscape.
As sanctioned entities become more and more intelligent, hiding themselves behind increasingly complex structures, it is critical for firms to be aware of not just the individual terrorist or oligarch on the global sanctions list, but all companies and financial instruments controlled by, owned by, or even connected to them. While these may not be named on the sanctions lists themselves, interacting with them could result in significant fines for the bank involved.
By monitoring close to 25,000 movements a week, the SSMS provides critical insight for companies to be able to remove the unknown and avoid not just the financial damage that comes with breaching sanctions, but the longer-term reputational damage.
At the end of the day, it’s up to every firm to steer its own ship. What SIX does is provide the right binoculars so they can spot icebergs before they hit.