The Art of Transaction Monitoring to Catch Sanctions Dodgers

We are excited to launch our "Sanctions in Focus" series, featuring five concise posts that explore the challenges firms face in navigating the ever-evolving landscape of sanction management. This series will provide insights on how to strengthen your current sanction protocols, redefine your operational model, and implement cutting-edge technology to streamline and enhance labour-intensive sanction operations.

In the complex world of financial transactions, ensuring compliance with sanctions is a critical aspect of risk management. Sanctions are powerful tools used by governments to exert economic and political pressure on specific countries, entities, or individuals. However, the effectiveness of these measures can be undermined, where prohibited activities are conducted through illicit means to avoid detection. Projective Group consultants Clarisse Mallem and Grishma Gupte explain how effective transaction monitoring systems must have strong and continuously improving teams to deal with those subjected to sanctions as they develop ever more sophisticated evasion tactics.

Understanding Sanctions Circumvention

Sanction circumvention refers to actions taken to evade the restrictions imposed by sanctions. This can involve a variety of tactics, such as using front companies, altering shipping routes, or setting up complex ownership structures to disguise the true nature of transactions. The goal is to continue prohibited activities without being detected by regulatory authorities or financial institutions.

Circumvention poses significant risks to global security and stability, as it allows sanctioned entities to continue their operations, potentially funding illicit activities. Financial institutions have a strict liability in ensuring the identification and prevention these activities.

This means that organisations can be held accountable for breaches of sanctions regulations regardless of intent or knowledge.

This means that organisations can be held accountable for breaches of sanctions regulations regardless of intent or knowledge. Even inadvertent violations can result in significant penalties. This places a greater onus on organisations to ensure their compliance systems and operating models are robust and effective.

A Cat-and-Mouse Game to  Prevent Sanctions Evasion

Transaction monitoring systems are vital tools in the fight against financial crime, especially sanctions circumvention. These systems analyse financial transactions in real-time, flagging any activities that may indicate attempts to evade sanctions. However, the effectiveness of these systems depends on their ability to accurately minimise false positives while ensuring true matches are flagged.

The effectiveness of transaction monitoring systems depends on their ability to accurately minimise false positives while ensuring true matches are flagged

An effective transaction monitoring system must identify patterns and information that may be indicative of circumventions. This is essential to ensure compliance. A robust transaction monitoring system will involve setting parameters that align with the organisation's risk appetite, ensuring that the system can detect suspicious activities without being overwhelmed by false positives. Regular reviews and updates are necessary to keep the system responsive to emerging threats and changes in the regulatory landscape.

Why Human Instinct Supercharges Transaction Monitoring

While technology plays a crucial role, the human element is equally important. The monitoring team must validate true matches and discount false positives, providing detailed feedback that can be used to refine the system calibration. This feedback loop ensures continuous improvement, making the system more adept at identifying genuine threats.

For firms adopting a dynamic approach, the expertise and ability of the team to identify patterns that are indicative of sanction circumvention attempts has been crucial in traditional rule-based transaction monitoring systems in a continuous improvement loop. However, they can be effective yet still result in a high number of false positives. To enhance efficiency, organisations are increasingly adopting newer technologies such as machine learning and advanced analytics. These technologies can analyse vast amounts of data to identify patterns and anomalies that may indicate sanction circumvention to complement – and where possible – learn from analysts’ feedback.

Organisations are increasingly adopting newer technologies such as machine learning and advanced analytics.

Machine learning algorithms can adapt and learn from new data, improving their accuracy over time, but are still not sufficient on their own to replace the expertise and intuition of a specialist monitoring team.

The Importance of Management Information (MI) and Data Input

Clear management information (MI) and accurate data input from transaction teams are critical to the success of transaction monitoring. MI provides a comprehensive view of the system's performance, highlighting areas that need improvement and helping to refine the organisation's risk appetite. Accurate and timely data input ensures that the system has the information it needs to function effectively.

Clear management information (MI) and accurate data input from transaction teams are critical to the success of transaction monitoring.

Organisations must invest in training and resources to ensure their transaction teams can provide high-quality data and feedback. This includes regular training sessions, access to advanced tools, and a culture that encourages continuous improvement. By empowering their teams, organisations can create a robust transaction monitoring system capable of detecting and responding to threats efficiently.

Transaction Monitoring - From Alerts to Action

Effective sanctions compliance is a dynamic process that requires a well-tuned transaction monitoring system, a dedicated well trained monitoring team, and the integration of advanced technologies. By balancing risk appetite and efficiency, organisations can minimise false positives and ensure true matches are flagged. Continuous refinement, quality information, and clear management information are essential to creating a feedback loop that supports the evolution of the system. As the financial landscape continues to evolve, organisations must stay ahead of emerging threats by leveraging machine learning and advanced analytics to enhance their transaction monitoring capabilities and prevent sanction circumvention.

As the financial landscape continues to evolve, organisations must stay ahead of emerging threats by leveraging machine learning and advanced analytics.

About Projective Group

Established in 2006, Projective Group is a leading Financial Services change specialist.

We are recognised within the industry as a complete solutions provider, partnering with clients in Financial Services to provide resolutions that are both holistic and pragmatic.  We have evolved to become a trusted partner for companies that want to thrive and prosper in an ever-changing Financial Services landscape.

Projective Group has a deep talent pool trained in Financial Crime, Customer Due Diligence, and Sanctions. Our unique recruitment and people management approach means that we can rapidly mobilise, train, and deploy a team to support either run-the-bank activities or ad-hoc remediation or implementation projects. Our ongoing monitoring of the market environment ensures that our talent pool is always readily available and equipped to be rapidly deployed to support our clients’ emerging challenges.