“Thou shalt not…” deal with sanctioned entities

Ensuring that the bank does not trade with legally prohibited entities is currently the top concern of the wholesale side, some suggested at SWIFT’s March Operations Forum (SOFA), an event at which technology to help the industry handle sanctions was announced.

Ironically, no U.S. bank is among the 11 planning to use SWIFT’s sanctions testing and screening service when it debuts mid-April.

However, George Doolittle, head of global payment services with Wells Fargo Bank NA, does not read this as a lack of interest by U.S. banks (which are generally deemed the furthest along in procedures to combat the funding of crime, terrorism, etc.).

Surprisingly, Doolittle said he rates sanctions testing as a greater regulatory burden than Dodd-Frank and Basel III requirements, of which one hears vastly more. He was speaking in an interview after a session on the future of the payments business in which he noted, “Seventy percent of my day gets spent on regulation, and I’m the head of a  sales business”.

Chris Church, chief executive of SWIFT Americas echoed this, saying in an interview that regulation is the most pressing issue now for SWIFT’s members in the U.S. Mentioning SWIFT’s new sanctions service during his session, Church said, “Sanctions are not new but there’s a new complexity and ferocity with which non-compliance is being addressed”.

RBS was disciplined by U.K. regulators in 2010 for not continuously ensuring that its sanctions system worked—analogous to a fire alarm being only as good as its battery, noted SWIFT’s technology provider for its new service. Ian Horobin, founder and chief executive of Omnicision, said regulators no longer approve of merely manual systems and do spot tests of computerized systems with their own data.

Speaking at the conference, Horobin said, “already, today there have been three changes to the sanctions lists.”

Scott Kinney, compliance manager with Wells Fargo, said he has 40,000 entities to track, from three of  the main regulatory bodies sanctions’ lists, alone. These entities could be individuals, countries, ports, vessels, currencies, etc.

Kinney spoke not in Wells’ Doolittle’s session, but in the one introducing SWIFT’s two-part service: screening and testing. The first, will have a centrally managed utility update of regulators’ lists and will check all payments and trades using SWIFT’s existing system, FIN, against those sanctions. The second, testing of banks’ existing computerized sanctions systems, will likely be of more interest to large banks, presenters suggested, since up to 70% of their compliance costs go towards having people review possible problems.

Eliminating ‘false positives’ will be a huge plus, said Horobin, an artificial intelligence specialist. He emphasized that banks are expected to go beyond boycotting explicitly prohibited entities—or the 40,000+ listed entities Kinney mentioned. Anticipating potential problems using so-called fuzzy logic produces 4.2 trillion possibilities, Horobin claimed.

Even a seemingly simple matter isn’t. “What is a name?” asked Nicolas Stuckens, manager of SWIFT’s sanctions initiatives. “Is it two-parts, like in the U.S. and Europe, or three-to-four, like in the Middle East?” This after an attendee, who spoke from the floor at Stuckens’ session and identified herself as a Canadian regulator, said the lack of rules around names, etc., in SWIFT data fields made it harder to combat money laundering.

Similarly, globalization poses a problem for Bank of America Merrill Lynch, noted one of its managing directors, in another session. Ather Williams III, head of global payments and treasury solutions, said the bank is “now 98% automated” with regard to complying with the U.S. sanctions regulator, the Office of Foreign Assets Control (OFAC). “But,” he said, “there are challenges, like name checking, particularly as we go into places like China”.

Wells’ Doolittle doubted whether a bank of Wells’ size would use SWIFT’s screening service. “The regulators are now expecting us to go to more levels… so specific to each bank that we can’t outsource,” he said.

However, he welcomed it as one of many ways in which banks could share mutually beneficial information.

Doolittle noted that as he spoke the European Union was considering joining the U.S. ban on trade with all Iranian banks. “The question becomes,” he said, “are you trading with a bank that’s trading with a bank that’s trading with an Iranian trading family?”