In financial services, active compliance is more important than ever. The war in Ukraine, and the Gaza crisis, means that fallout from international relations reaches deep into the commercial world. Heightened geopolitical turmoil necessitates an even more robust approach to regulatory compliance. These must transcend standard procedures and look at all elements of KYC with fresh eyes.
In the US, President Biden’s Executive order 14114 brings this point home. It empowers the Secretary of the Treasury, consulting with the Secretary of State and the Secretary of Commerce, to sanction foreign entities (including financial institutions) and thus businesses working with them, that have, broadly, aided the Russian war effort. Read the order, and you’ll see how easily businesses may become vulnerable.
Look where you’re headed!
Regulatory compliance includes ensuring potential or existing clients are not on any sanctions lists. And swifty moving international affairs means entities once deemed safe can swiftly transition to “sanctioned”, impacting businesses that previously engaged with them. Thus, the demand for vigilance is constant. Alongside is a need for a comprehensive knowledge of sanctions lists (often in multiple jurisdictions), including individuals and entities, and the implications for businesses interacting with newly sanctioned organizations.
In parallel, there is the growing challenge of politically exposed persons (PEP). A PEP is an individual who holds a prominent public position or has a close relationship with such a person, potentially posing a higher risk for involvement in bribery or corruption. However, identifying PEP requires understanding the broader context and the actual risk presented, as opposed to the apparent hazard. Much depends on circumstance – and detailed background information.
Recognizing Risks in PEP
The complexity in dealing with PEPs lies in avoiding inaccurate determinations – false negatives, where a high-risk individual is not identified, and false positives, where a low-risk individual is mistakenly flagged. This delicate balancing act highlights the need for a comprehensive, nuanced approach to compliance. Accordingly, despite the temptation to turn to AI (where even specialist models can “hallucinate”), greater security is found in systems which use proven technology to accurately identify and evaluate real risks.
A service like Compli from Essiell Compli, for example, provides exactly this robust and flexible solution. It’s capable of addressing these challenges, with a rules-based model than can be tuned to the specific needs of individual businesses. One of Compli’s strengths lies in its ability to create a global person profile from multiple databases. This capability is pivotal, particularly in the context of PEP and those identified on sanctions lists. It ensures that even the most determined individuals find it challenging to evade detection.
The Need for Nuance is Greater Than Ever
The sophistication of Compli’s system is not just in its comprehensive data coverage. It lies also in its nuanced approach to risk assessment. By evaluating context and actual risk, Compli helps financial institutions navigate the grey areas that often surround PEP and sanctioned entities. This is vital in an environment where the stakes are high, and the cost of non-compliance can be catastrophic, both financially and reputationally.
When regulations can change quickly, where edges are blurred between domestic and international politics, the financial services sector cannot be complacent. The need for a comprehensive, agile, and sophisticated compliance has never been greater. Compli, with its deep capacity to manage complex rules and regulations, is perfectly suited to deliver.
By Declan Morton, staff writer at Essiell Compli Ltd.
For reference
- Executive Order 14114 of December 22, 2023, Federal Register/Vol. 88, No. 246/Tuesday, December 26, 2023/Presidential Documents
- Financial Services Industry Must Navigate the Russian Sanctions and Anti-Money Laundering Compliance Terrain as Treasury Signals Historic Enforcement Efforts, Duane Morris LLP, January 29, 2024
- The pros and cons of generative AI in AML compliance, Compliance Week, January 29, 2024
