The 4 Risks of Not Automating Sanctions Compliance

Whether you work in BSA/AML compliance at a bank or other type of financial institution (FI), you know that sanctions screening has become increasingly more complicated across the industry in recent years. As if the thousands of sanctions tranches released since early 2022 were not enough, the already overburdened financial crime teams at banks and other FIs continue to struggle with employee shortages and growing backlogs of sanctions screening alerts — all as regulators keep ramping up their efforts to enforce anti–money laundering (AML) compliance regulations.

If your organization has not yet adopted the technologies to keep pace with the growing sanctions compliance burden, it’s time to heed the wakeup call. The right scalable, AI-smartened automation technology exists today, and compliance teams have powerful reasons to leverage it. As the Wolfsberg Group concluded in their guidance on sanctions screening, “technology remains a key enabler in the effectiveness of identifying financial crime risk through screening, more efficiently and on a real-time basis.”

Regulators know that automated compliance should be a reality across the industry. That’s why, since 2021, regulators from the U.S., U.K., EU-member countries, and Australia have been handing out ever-larger fines and penalties against FIs of all kinds — Neobanks, traditional banks, crypto firms, trading exchanges, etc. — for failing to take the necessary steps to optimize FinCrime compliance operations.

Risks go far beyond fines and penalties

Fines and penalties from regulators are not the only risks when your organization fails to automate and scale your compliance operations in line with demand. In fact, you face four major risks when you fail to automate sanctions compliance, and we address them all in our new eBook, The Risks of Not Automating Sanctions Screening.

Here’s a quick view of the four most common risk factors discussed in the eBook:

  1. Cyclicality of sanctions
  2. Elevated sanctions response costs
  3. Insufficient number of FinCrime analyst staff
  4. Inability to pinpoint ‘true hits’ among huge alert volumes

Risk #1: Cyclicality of sanctions

Crypto firms and banks alike must deal with significant fluctuations in AML and sanctions alert and KYC volumes. For example, each time a new coin offering appears, crypto firms can expect ten thousand or more new customer sign-ups that require KYC scaling. On the AML and sanctions front, a single event like the Russian invasion of Ukraine led to immediate new sanctions for over 1,300 people and entities.

These types of AML/KYC and sanctions demand surges strain any compliance program that lacks a highly elastic infrastructure or workforce. But compliance teams are far from elastic, taking 2–3 months just to bring a new analyst up to speed.

Risk #2: Elevated sanctions response costs

According to research by LexisNexis Risk Solutions, the average annual cost of FinCrime compliance operations for U.S. and Canadian FIs grew 13.6% from 2021 to 2022 alone. When alert volumes spike, it’s not uncommon for individual analysts to face 500 or more alerts per day. Who has the budget to hire double or triple the number of analysts they already have?

Risk #3: Insufficient number of full-time FinCrime analyst staff

Even if you had the budget to hire a large number of new analysts, they’re nowhere to be found in today’s job market. The Great Resignation of the pandemic years has made it a permanent situation that FIs find themselves short of FinCrime compliance analysts. It’s simply not possible to hire enough people as the list of sanctions grows.

The shortage of full-time employees and the lack of automation needed to scale up to handle high alert volumes is forcing a tradeoff between employee experience (EX) and customer satisfaction (CSAT). For organizations that have not yet embraced modern technologies for FinCrime compliance, operations executives have just two choices in this tradeoff of only bad choices:

Choice A. Force employees to work longer hours to implement new sanctions and handle the larger volume of sanctions alert reviews. This helps to maintain customer service levels and CSAT. Yet, it also leads to high employee burnout and staff turnover — making the compliance operations team even more shorthanded in the medium and longer terms.

Choice B. Maintain positive EX levels by allowing employees to operate in a business-as-usual environment. Of course, you can only do this by hiring third-party labor at extremely high cost. Don’t want to pay up for pricey labor? You’ll end up watching your CSAT scores deteriorate due to longer freeze times on customer accounts caused by the backlog of sanctions alerts. This actually poses the greatest risk to FIs, as L1 analysts may never see the most complex alerts in time to stop FinCrime from occurring.

Risk #4: Inability to pinpoint ‘true hits’ among huge alert volumes

Nearly as important as spotting FinCrime is the need to allow the continuous flow of legitimate transactions. Unfortunately, false positives represent 95–99% of sanctions screening alerts and can be painfully slow for a person to resolve. Banks and FIs lacking AI-based automation in this area often fail to easily spot the difference between legitimate and illegal transaction characteristics.

In the end, the time and money spent to review thousands of false positives highlight an efficiency problem that can lead to missing the few true crimes among a sea of false positives. Often, the rare true positive gets overlooked due to resource strain from reviewing thousands of false positives.

Manage sanctions risk by automating sanctions compliance

Financial institutions devote thousands of employees and billions of dollars to AML and KYC compliance. In fact, it is not uncommon that alert review teams (sanctions and AML combined) make up more than 50% of a bank’s compliance staff.

Using time and money to review thousands of false positives is an efficiency problem that can lead to missing the bad actor “needle in the haystack,” that rare true positive, due to resource strain from reviewing thousands of false positives.

This is where AI Digital Workers come into play. Digital Workers quickly resolve the open headcount challenge faced by every FI today, and at the same time, optimize the quality of alert reviews by resolving more than 70% of alerts before they ever make it to an analyst team. As a result, Digital Workers allow L1 sanctions alert review analysts to focus their attention on the most complex alerts, the ones that pose the greatest risk.

Learn more from one great resource

Download this new eBook which we created based on our 10+ years of helping banks and FIs automate operations, and more recently, battle FinCrime with highly cost-efficient and effective AI-driven Digital Workers. Download your copy now!

Share this article