Estimated reading time: 6 minutes

Modern finance is global.

It’s easier than ever to buy anything from anywhere in the world because there are systems in place that allow money to travel effortlessly across borders.

While endlessly beneficial for businesses and consumers, this interconnectedness also helps illegitimate actors. Financial crime and sanctions circumvention have become more sophisticated, with criminals exploiting global networks to launder money, fund terrorism, and engage in other illicit activities. 

As a result, regulatory bodies worldwide have intensified their efforts to combat these threats, leading to frequent updates and new regulations.

It’s up to the financial institutions on the frontlines to adapt quickly to these changing conditions so they can be well-armed in the fight against financial crime.

Traditional compliance methods—often manual and time-consuming—are no longer sufficient given the volume and complexity of modern-day transactions.

Bank technology is designed to be stable and reliable, not agile

Banks are often heavily criticised for operating on archaic technology systems but these criticisms overlook the fact that banking systems were designed for stability, security, and reliability, not agility. 

They were not built to adapt quickly to fast-changing regulatory demands and shouldn’t try to. The foundational strength of these systems is ensuring secure and reliable operations. Any system upgrade that could cause service disruptions is too risky for many financial institutions to consider.   

But that doesn’t change the pace at which financial crime and regulatory changes occur.

Thankfully, financial institutions don’t need to overhaul their entire core systems to remain compliant. 

The future is modular.

The building blocks of compliant trade finance

A modular approach to financial crime risk assessment involves breaking down the overall risk assessment process into smaller, independent components or modules, with each module targeting a specific area, like customer due diligence, transaction monitoring, or sanctions screening.  

Similar to Lego blocks, these modules can be stacked, connected, and combined into any structure that fits a financial institution’s specific needs. 

For example, an institution may focus on customer-level risk assessments in one region while prioritising transaction-level monitoring in another. 

A system can be configured to align with an institution’s internal policies and regulatory expectations, enhancing compliance and supporting business objectives by allowing institutions to manage risks without stifling legitimate transactions and trade.

This flexibility ensures that resources are allocated efficiently, addressing the most pressing compliance challenges at any given time while ensuring that financial institutions can demonstrate regulated and defensible compliance. 

Harnessing AI to combat sanction circumvention

In the contemporary landscape of financial crime prevention, the integration of Generative AI (Gen AI) into compliance strategies marks a shift in how financial institutions address a range of challenges, including the ever-increasing challenge of sanction circumvention. 

Reflecting on the evolution of sanctions, particularly those targeting Russia, the industry observed a sophisticated maturation from the initial 2014 measures to the comprehensive iterations following February 2022. 

During these stages, technologies were developing, primarily focused on identifying and mitigating risks in static scenarios. However, the scenario has drastically changed with the advent of Gen AI. This technology has not only refined but also advanced the approach towards identifying risks related to sanction circumvention—shifting from reactive to proactive risk management.

Today, financial institutions employ Gen AI to perform intricate analyses of transactional data, enabling them to unearth hidden patterns and relationships indicative of potential compliance breaches. This can happen within existing technology, or as a purpose-built data workflow alongside existing technology. 

For instance, when a transaction is flagged, the subsequent review process is no longer as laborious as before. Previously, analysts might spend hours, if not days, manually searching through data and requesting additional documentation to confirm a transaction’s legitimacy.

Gen AI accelerates this process by automating the creation of detailed profiles for transaction originators and beneficiaries. This is via advanced API and using AI algorithms that integrate diverse data sources, such as Google Maps, to provide a holistic view of a transaction’s context. By doing so, it mitigates the time-intensive aspects of compliance, allowing analysts to focus on higher-level decision-making and strategy formulation.

The practical application of Gen AI in financial settings is illustrated by its capacity to streamline and enhance the accuracy of sanction screening processes. For example, when a payment is halted due to a potential sanction risk, Gen AI can quickly analyse the associated parties and the nature of their past transactions. 

This enables institutions to rapidly ascertain the risk level of proceeding with the transaction, significantly reducing the time spent on each case and minimising the likelihood of inadvertent non-compliance.

Moreover, the integration of Gen AI into compliance frameworks supports financial institutions in maintaining agility amidst tightening margins. By automating routine compliance checks and risk assessments, banks can preserve their operational efficiency while adhering to regulatory requirements—thus safeguarding their reputation and financial standing in the global market.

Case study: Uncovering sanctions circumvention

Many nations, including the USA, have imposed sanctions on Russia following its 2022 invasion of Ukraine. Despite the sanctions, Russia has still been able to acquire many sanctioned goods by leveraging legacy trade networks with its neighbours.

Financial institutions in these regions that help with sanction circumvention—intentionally or inadvertently—risk severe consequences, such as losing access to Western financial systems, facing substantial fines, and damaging international relationships.

To help prevent this, a regional bank in the area sought to proactively identify payment originators and beneficiaries in the markets most associated with Russian sanctions circumvention. 

Using the Entity Resolution, Activity Check, and Investigative Analysis analytical modules from Elucidate, the bank was able to identify the payments, originators, and beneficiaries with the most concentrated risk. 

By isolating the risk, the bank could focus on preventing the highest-risk payments and use existing tools to screen for those names without impacting the experience for its legitimate customer base. With this approach, within the first 60 days, it achieved a 30% reduction in sanction circumvention risk while ensuring that its procedures adhered to independent regulatory standards.

The rapidly evolving regulatory landscape demands innovative solutions for financial crime risk assessment. A modular approach offers a comprehensive answer, providing flexibility, customisation, and regulated defensible compliance. 

As globalisation and financial crime threats continue to grow, financial institutions must leverage advanced technology to stay ahead. By adopting modular systems, they can efficiently manage risks, meet regulatory requirements, and support global economic stability by constructing financial compliance that meets their unique needs. 

This approach ensures compliance and enhances operational efficiency, positioning institutions to thrive in an increasingly complex and global world.