FedNow Is Here. Is Your AML Team Ready for the Real-Time Sanctions Compliance Risks?

Last week the U.S. Federal Reserve launched FedNow, its long-awaited real-time payment (RTP) system. The platform is an alternative to the Real-Time Payments (RTP) network from The Clearing House and modernizes the country’s payment system by eventually allowing all Americans to send and receive funds in seconds, 24 hours a day, seven days a week,

Unlike peer-to-peer payment services like Venmo or PayPal, payments made via FedNow will settle directly. However, the convenience of RTP does not come without risks. Faster payments still need to have strong anti-money laundering (AML) and Sanctions controls in place, including transaction monitoring and transaction screening, to protect businesses from high-risk customers and ensure the integrity of the global financial system.

At a recent Transform Payments USA conference, Assistant Secretary for Financial Institutions Graham Steele said, “we must keep in mind that faster payments also require responsive risk-management, error identification, and fraud response. With the ability to move money instantaneously between accounts, we face potential fraud scenarios that are more complex and intricate than in traditional deferred settlement payment systems. To mitigate this, we need to consider how we can harness technology and policy to help mitigate risks.”

It’s also important to note that per FedNow’s Operating Procedures, AML and Sanctions compliance-related requirements of FedNow participants are non-negotiable. Among these requirements are “Reasonable procedures for screening customer information against current sanction lists and updated lists to the extent customers might be a party to a FedNow Service transaction.” In the event these terms are breached, “The Federal Reserve Banks maintains the right to terminate or restrict a Participant’s access to the service, including if a Participant fails to comply with the Federal Reserve Bank’s Operating Circular requirements or applicable law.”

What are the risks that you need to overcome to ensure your organization is maintaining AML/Sanctions compliance?

Risk 1: Possible Delays from Sanctions Screening Alerts Review

As the popularity of RTP accelerates, the time it takes to review sanctions alerts also increases exponentially — creating a potential bottleneck. On average, it takes 1–3 minutes of a human reviewer’s time per transaction, and that’s if the alert is worked immediately. Alerts are generated as transactions are processed and often sit in queues waiting for an analyst to pick it up, increasing the average time worked. This means that RTP’s real-time alert processing is no longer happening in real-time if it’s done by a person — jeopardizing customer experience and devaluing the instantaneous nature of instant payments.

Financial institutions (FIs) must deliver a seamless and frictionless customer experience for RTP including speed, security, and convenience to create a competitive advantage, maintain revenue, and prevent reputational damage.

Risk 2: Cross-Border Payments Adding Complexity

While domestic RTPs can be relatively low risk for sanctions, cross-border payments are another story. Cross-border payments are exceedingly more complex since they involve bridging multiple currency systems and regulatory jurisdictions, and higher risk countries, leading to the generation of far more sanctions alerts.

Today, cross-border payments no longer take hours, they are nearing real-time, with many transactions now being processed in minutes, or even seconds. This means for sanctions screening to be effective, the information included in payment messages needs to be good quality, which is often the biggest challenge for compliance in the RTP space.

The increased potential for financial crime and sanctions evasion with cross-border RTP has attracted the attention of regulators. You need to know where the money is going, not just who is sending it.

Over the past year, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) has brought several enforcement actions on FIs that were in violation of sanctions compliance controls, specifically related to their failure to use geolocation tools.

For example, in November 2022, OFAC announced a $362,158.70 settlement with Payward, Inc., aka Kraken, a virtual currency exchange for cryptocurrencies. Kraken agreed to settle its potential civil liability for apparent violations of sanctions against Iran. Due to Kraken’s failure to timely implement appropriate geolocation tools, Kraken exported services to users who appeared to be in Iran when they engaged in virtual currency transactions on Kraken’s platform.

Additionally, in September, Tango Card, a Seattle company that supplies and distributes electronic rewards, agreed to pay $116,048.60 to settle its potential civil liability for apparent violations of multiple U.S. sanctions programs. According to the Department of Treasury, “While Tango Card used geolocation tools to identify transactions involving countries at high risk for suspected fraud and had OFAC screening and Know Your Business mechanisms around its direct customers, it did not use those controls to identify whether recipients of rewards, as opposed to senders of rewards, might involve sanctioned jurisdictions.”

How AI Digital Workers Can Help

Alert fatigue is draining on Operations and Compliance teams and adds time to the sanctions screening process. Given the use of fuzzy logic and conservative thresholds, sanctions screening software generates many sanctions alerts, and for most financial institutions, 99% of those alerts are false positives. For each alert, the payment is held up pending review. This means real-time isn’t near real-time anymore, it just becomes a wait.

In response, FIs directly employ or contract out dozens or hundreds of people to manually review these alerts. Using time and money to review thousands of false positives is both an effectiveness and efficiency problem that can lead to missing that rare true positive as analysts become so used to nearly all alerts being false positives.

Meet our AI Digital Worker solution, Tara. Tara functions as an extension of your team to review sanctions alerts in real-time to protect financial institutions from processing payments from sanctioned organizations and individuals.

Tara adjudicates L1 alerts with better accuracy and effectiveness, greater efficiency, and with a more comprehensive audit trail than teams of people. “She” will review payment messages and associated screening alerts and hits before auto-dispositioning them as either false positives or potential escalations. Tara automatically conducts research for decision-making and drafts human-readable justifications that are ultimately entered into your screening software’s case management workflow to provide an audit trail. The technology can also integrate with internal databases and external data providers to increase the alert review automation rate.

Following OFAC’s guidance from September 2022, AI tools like Tara can mitigate many of the sanctions’ risks associated with RTP, including:

• Accelerating exception processing to near real-time, thereby mitigating sanctions risk and maintaining speed-of-transaction.
• Instantaneously resolving exceptions (sanctions alerts) and allowing the payment to progress with no effect on the customer.
• Determining those payments consistent with past customer behavior, which a financial institution has previously vetted and cleared for potential sanctions implications. Therefore, the exception can be reviewed and processed in real-time.
• Evaluating data fields in the payment messages associated with exceptions, eliminating the false positives, and escalating only potentially true positives to compliance teams.
• Leveraging geolocation tools to identify potential sanctions violations.

Without question, FedNow will accelerate the US’ adoption of RTP. And, globally, RTP is expected to surpass half a trillion payments by 2025. As it gains traction, it has never been more important for BSA/AML and Sanctions organizations to leverage all the tools at their disposal including AI to ensure fast, seamless screening and continuous monitoring to identify potential financial crime activity for both domestic and cross-border payments to ensure customer experience and prevent regulatory violations.

Click here to schedule a demo of Tara.

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