Regulatory Intelligence: Wolfsberg Group Guidance on Sanctions Screening Promotes Risk-Based Approach

Topics: Financial Crime, Fraud, Government, Regulation & Compliance, Risk Management, Terrorist Financing

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The Wolfsberg Group has published new guidance for methods financial institutions should use to carry out sanctions screening.

Sanctions screening should be designed to detect, prevent and manage sanctions risk. It should be undertaken as part of the firm’s prevention of financial crime compliance program to assist with the identification of sanctioned individuals and organisations, as well as the illegal activity to which firms may be exposed.

As the Wolfsberg Group put it, “in light of the continuous expansion and growing complexity of international sanctions regulations”, the objective of the guidance is to help firms as they assess the effectiveness of their sanctions screening controls.

Key Issues

Sanctions compliance is not a “one-size-fits-all”, although the fundamentals are the same and build on the complex, often under- and overlapping, domestic and international legal and regulatory requirements, together with emerging expectations and international industry best or better practice. The guidance sets out where sanctions screening can be an effective part of a wider sanctions compliance program, where it has limitations as a control and where a risk-based approach is appropriate.

In detail the guidance includes sections on the definition of sanctions screening, the fundamental elements of a sanctions screening program, consideration of a risk-based approach, technology, alert generation and handling, reference data, transaction screening, list management and look-backs.

The Wolfsberg Group has recommended that firms should seek to adopt a risk-based approach to sanctions screening and should consider all aspects of a comprehensive sanctions screening control framework, as follows:

  • A firm must have a strong prevention of financial crime compliance program with a clear strategy in respect of sanctions screening, to mitigate the risk of being exposed to sanctioned parties and countries.
  • The firm’s approach should recognize that while sanctions screening is a primary control, it has its limitations and should be deployed alongside a broader set of non-screening controls to be truly effective.
  • It is important for firms to document their systematic approach to screening by linking it directly to their risk appetite statements.
  • The accuracy and completeness of the firm’s own data is central to an effective and efficient sanctions screening process.
  • Technology remains an important element in the effectiveness of identifying financial crime risk through screening, more efficiently and on a real-time basis.
  • Governance and oversight mechanisms must be put in place across the firm to ensure transparency of risk decisions to key stakeholders and risk owners.
  • The firm should ensure that people involved in the end-to-end risk event management are suitably trained and supervised, and that the appropriate levels of quality control and assurance are in place to ensure compliance with requirements.
  • Management information should be made available to report on effectiveness, trends and performance.

Compliance Tips and Next Steps

As with all Wolfsberg Group publications the guidance is practical and represents emerging industry best or better practice. At least in part, the guidance is a response to the persistent decline in correspondent banking relationships which has become a matter of international concern and which was part of the November 2018 Financial Stability Board action plan presented to the G20 Summit.

At the same time the FSB published an updated data report which showed that the decline in the number of active correspondents, as measured by the flow of messages, continued in 2017, with a year-on-year reduction of 4.1 percent at the international level. The November 2018 updates from the FSB build on the March 2018 progress report and the July 2016 technical report produced by the Committee on Payments and Market Infrastructures of the Bank for International Settlements.

Both reports had made a series of recommendations as to potential measures to help to ensure an efficient provision of cross-border payment services worldwide.

The Wolfsberg Group has already assisted international policy efforts by seeking to strengthen the tools for due diligence by correspondent banks, with large banks committing to implement the Wolfsberg Group Correspondent Banking Due Diligence Questionnaire by the end of 2019.

As the continued supranational policy focus has demonstrated, correspondent banking is seen as an essential component of the global payment system, especially for cross-border transactions. Through correspondent banking relationships, banks can access financial services in different jurisdictions and provide cross-border payment services to their customers, supporting and providing the mechanism for both international trade and financial inclusion.

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This is particularly important since most payment solutions which do not involve a bank account at customer level rely on correspondent banking for the actual transfer of funds. In the increasingly complex world of international and domestic sanctions, however, firms are finding it challenging and expensive to build and maintain an effective compliance program.

Banks have traditionally maintained a broad network of correspondent relationships, but these are in decline. Firms are cutting back the number of relationships they maintain and are establishing fewer new ones. There are various root causes for the decline in correspondent banking.

One of the major reasons cited is the uncertainty about how far customer due diligence should go to ensure regulatory compliance: in effect, to what practical extent banks need to know their customers’ customers and screen them for sanctions compliance. As a result, correspondent banking has been subject to de-risking with the associated withdrawal of services which:

  • do not generate sufficient volumes to overcome compliance costs;
  • are located in jurisdictions perceived as too risky;
  • provide payment services to customers for whom the necessary information to conduct an adequate risk assessment is unavailable; or
  • offer products or services or have customers that pose a higher risk for anti-money laundering/combating the financing of terrorism and are therefore more difficult to manage.

De-risking and the resulting decline in correspondent banking could be seen as an inevitable consequence of an increase in regulatory intrusiveness combined with the a more rigorous approach to enforcement. Firms around the world have been reviewing their business models and activities and choosing to divest themselves of anything perceived as carrying too much regulatory or other risk.

Sanctions and sanctions compliance need a risk-based approach but firms must give careful consideration to all financial crime risks. Sanctions and other financial crime risks should be an important element of all new and existing business assessments.

All firms should review the Wolfsberg Group guidance on sanctions screening. They may choose not to follow some or all of the guidance but, should there be a regulatory problem, questions may be asked as to why acknowledged industry best practice has been ignored.

Firms should also be aware that perhaps the most critical of the guidance conclusions is the one covering specialist skill sets. Without appropriate and continuing investment in the skills required, a firm will be unable to ensure the people involved in end-to-end risk event management are suitably trained and supervised, and that the appropriate levels of quality control and assurance are in place to ensure compliance with requirements.