Financial Institutions Struggle to Manage Screening Systems Amid Rising Complexity and Costs
The process of screening natural persons, legal entities, and transactions is a critical component of Anti-Money Laundering (AML) and sanctions compliance. However, it has become increasingly challenging for financial institutions to manage their screening systems effectively due to the high frequency of updates to sanctions lists, strict liability associated with OFAC violations, and complex activity-based Russia sanctions.
Challenges in Screening Systems
A recent industry roundtable hosted by Capgemini, Hummingbird, and WorkFusion brought together senior representatives from various financial institutions to discuss the challenges and opportunities in the screening arena. The key issues raised during the roundtable included:
- High frequency of updates: Frequent changes to OFAC and other sanctions lists make it difficult for financial institutions to keep their systems up-to-date.
- Strict liability associated with OFAC violations: Financial institutions face strict penalties for non-compliance, making it crucial to ensure accurate screening.
- Complexity of recent activity-based Russia sanctions: The complex nature of these sanctions requires careful analysis and attention to detail.
- Dealing with various regulatory obligations and supplementary considerations across geographies: Financial institutions must navigate different regulations and requirements across multiple jurisdictions.
- Limited information on counterparties: Insufficient information about counterparties can make it challenging to conduct effective screening.
- Budgeting and staffing constraints: Limited resources can hinder the ability of financial institutions to invest in effective screening systems.
- High levels of false hits: False positives can lead to wasted time and resources, as well as potential reputational damage.
- “Noise” surrounding alerts, including insufficient or immaterial data: Irrelevant or incomplete information can make it difficult to identify genuine risks.
Operational Challenges in Trade Finance
Manual inputs from letters of credit and other documents result in numerous errors, highlighting the need for more efficient and automated processes. The lack of ability to identify and analyze key informational items in an efficient fashion was also mentioned as a challenge.
Implementing AI-Based Tools
Financial institutions are exploring the use of AI-based tools to address duplication of due diligence reviews and promote better sharing of information among teams and throughout the organization. However, implementing modern AI-based tools for screening processes presents challenges that require careful planning, internal support, collaboration between IT and business units, attention to regulatory imperatives, and a strategic approach to ensure smooth integration.
Benefits and Challenges of AI-Based Tools
The benefits of employing modern AI-based tools for screening processes are compelling and have been embraced by financial industry regulators. However, the challenges associated with implementing these tools necessitate careful planning, internal support, collaboration between IT and business units, attention to regulatory imperatives, and a strategic approach to ensure seamless integration.
Regulatory Acceptance
Ensuring regulatory acceptance is crucial when implementing AI-based tools for screening processes. Important aspects include:
- Explainability: The ability to explain the reasoning behind AI-driven decisions.
- Transparency: Providing clear and transparent information about AI-based decision-making.
- Accountability: Assigning responsibility for AI-driven decisions and actions.
- Proper model risk and data management: Ensuring that AI models are well-managed and that data is accurate and reliable.