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News

Five money-laundering screening pitfalls

Datanomic : 29 October, 2009  (Technical Article)
Datanomic provides advice on avoiding the legal pitfalls that could create regulatory problems for financial service companies
Compliance screening and data management specialists, Datanomic, has outlined the five most common pitfalls surrounding client screening and anti-money laundering requirements. Many companies still don't understand the fundamentals of client screening or their responsibilities under the law. The lack of understanding, misconceptions and assumptions are likely to cost institutions heavy financial penalties as enforcement of national and international legislation continues against those who breach it. The five most common mistakes that can land firms and individual managers/executives in hot water with regulators include:

1. Exemption Assumptions - Many firms incorrectly believe they are somehow exempt from the financial services regime if they process low value transactions. Other firms believe financial sanctions screening is unnecessary if they do not hold client money, make payments or if they deal in products which they assess as low risk for financial crime. Likewise, many insurance firms erroneously believe that insurance is a no or low risk area for sanctions, or that UK financial sanctions do not apply to insurance.

2. Fragmented Approaches - Lack of understanding, varying departmental processes and poor application of technology have led to differing degrees of compliance with Sanctions regulations. Poor quality of customer data is a major obstacle for many, with companies often unable to identify individuals across multiple systems. The underlying cross-departmental discrepancies in customer data exposes firms to increased risk of breaching financial sanctions in some part of their company.

3. Failure to Minimise False Positives - Every occurrence of a client record matching to a name on a sanction, risk or PEP register must be investigated. "Fuzzy" techniques are essential to find inexact matches such as name variations, spelling mistakes or other variances, but they often produce large amounts of output for review and the vast majority of these will be false positives. The review and research of false positives costs institutions considerable time and manual effort. Reducing the number of false positives when screening client data against risk data sources can cut costs by as much as 70%, yet few organisations understand how to apply the advanced technologies to do so.

4. Underlying client data that is not Fit-For-Purpose -.The FSA mandates that firms must ensure their client data is kept up-to-date and as complete as possible. However, many organisations hold customer data in disparate systems or across complex IT infrastructures, often resulting in duplicate, inaccurate and incomplete client data. Screening customer data that is not fit-for-purpose is one of the most common mistakes jeopardising sanctions compliance. Clean, accurate, up-to-date customer data combined with sophisticated fuzzy matching algorithms are the fundamental keys to effective financial sanctions screening.

5. Failure to conduct ongoing screening - Watch lists are frequently updated with changes and new additions. One of the most expensive mistakes financial firms make is failure to re-screen customers as frequently as the watch lists themselves change. As the FSA states, it is hard to understand how any firm can achieve its compliance requirements if it is not screening its entire customer base at least as frequently as the UK Sanctions list itself changes. Those firms that screen a client only during on-boarding and infrequently thereafter are exposing themselves to considerable risk. Compliance should be capable of systematically and comprehensively screening customers against global sanctions lists or be prepared to face the growing financial penalties associated with a breach.

"Global regulators are becoming increasingly aggressive in their enforcement of the law, yet many banks, insurance companies, other financial services and law firms remain ignorant of the issues at hand, or worse, complacent when it comes to their specific sanctions screening responsibilities," said Simon Pearson, Vice President of Risk & Compliance Screening at Datanomic. "Size of company, complexity of IT infrastructure or even just the failure to understand your obligations with regards to legislation do not exempt you from prosecution. The consequences of getting it wrong can be severe - ranging from personal or company fines to imprisonment for individual MLROs. By addressing these five fundamental issues, firms can significantly mitigate their risk of a compliance breach and the resulting penalties."

Datanomic's Sanctions & PEP Screening software is used by firms to screen more than two billion customer records every month and is recognised as the Sanctions/PEP compliance platform of choice by two of the top ten global Retail Banks, 50% of the UK's Top 10 Wealth and Asset Managers and some of the world's largest Insurance companies, Credit Card providers, Hedge Funds, Brokers, Merchant Banks Investment Banks, e-Money providers and Law Firms.
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