By Marc Smith, Founder and Director Conpend

Sanctions monitoring is a complex and time-consuming task, even at the best of times. Present circumstances have served to highlight how pressurised and complicated sanctions checks can be to the extreme. Digital solutions, however, can manage risks and streamline operations. Marc Smith, founder and director at Conpend, outlines how artificial intelligence is helping to build informed risk profiles and combat maritime fraud

Within days of the invasion of Ukraine, the EU, UK and US acted swiftly and decisively to sever financial and trade ties with Russia and Belarus, introducing new restrictions against businesses and wealthy individuals trying to obscure their assets. The international community has established sanctions that are global in nature, nonetheless, by no means have they been adopted by all countries and even companies.

Owing to the speed of the roll out, there is a lack of regulatory uniformity between international jurisdictions, not to mention a widespread dearth of implementation guidance is posing a particular challenge for compliance professionals. What’s more, illegal activity is also on the rise as those facing sanctions attempt to use fraud and money laundering to undermine the rules.

In a fast-moving and complex sanctions environment, compliance teams are facing increased workloads and mounting pressure. Indeed, the financial and reputational penalties for non-compliance are harsh. The US Department of Justice, for example, can pursue fines of up to US$1 million per violation.[i] In order to navigate the sanctions landscape, many are scrambling to ensure a practical, robust and comprehensive compliance-checking process. Yet an efficient and reliable solution is within their reach.

The dilemma for trade finance

Interestingly, the trade sector and its underlying system of trade finance are feeling the sanctions strain more than any other single industry, given that 80-90% of cross-border trade relies on trade finance. If prior to the war Russia ranked among the ten largest economies in the world and played a significant hand in global trade, the conflict has severely disrupted international trade flows and supply chains at a time when the industry had yet to fully recover from the Covid-19 pandemic.

In turn, banks are responsible for the flow of documentation and finance that facilitates trade. In order to approve transactions, they perform rigorous checks on trade documentation, from letters of credit to bills of lading. To this day, documents frequently arrive as physical paper copies that require manual review, with banks processing an estimated 28.5 billion paper documents each year and representing a significant dedication of their compliance resources.

In recent years, banks’ regulatory responsibilities have expanded, as have the penalties they face for non-compliance. More and more, banks help to maintain a secure and trusted global trade ecosystem. However, the rapid influx of sanctions at the beginning of 2022 was unprecedented and banks have struggled to update and execute compliance procedures. Indeed, the introduction of sanctions may necessitate the review of a bank’s entire trade portfolio. Under the current circumstances, banks are facing mounting costs to maintain a screening process that is thorough, flexible, and centred on quality and up-to-date data.

The stakes are certainly high. If they fail to comply with the new rules, including accidental misses, banks and their executives face high financial penalties and potential jail time, not to mention significant reputational damage.

In response, some banks are choosing to “de-risk” from the sector, taking the route of excessive caution in facilitating even permissible trade. But there is another way – one that shifts the crucial, yet monotonous, work of compliance checks onto technology. By using artificial intelligence (AI) and machine learning (ML) to support document-checking processes within the bank, a digital solution can relieve the heavy and complex compliance burden, while opening the door to a plethora of rich, interpretable data.

Shifting the sanctions strain onto technology

The current geopolitical environment is driving a need for banks to meet the highest level of sanctions compliance in an operationally efficient way. By designating monitoring and checking to AI, banks can streamline their screening processes. Whether trade documentation arrives at the bank as paper or electronic copies, a digital solution performs extensive checks quickly and effectively. AI is good at detecting patterns, for example, it can verify that a particular cargo’s port of loading is consistent across of the transaction’s documents. When it spots an anomaly, the system raises an alert. However, it is worth noting that the software itself does not take action – it is the operative’s responsibility to interpret the alert and choose how to react.

In order to understand the risk profile of a transaction, a bank needs to know as much as possible about the goods being traded: what they could be used for, their destination, and their method of transport including the vessel and its route. By leveraging this information, alongside rich sources of data such as databases and trackers, a digital solution can calculate and maintain a customer risk profile.

This insight into a customer’s activity and key trends helps compliance professionals to understand, at any given moment, the risk that a customer and their transactions pose to the bank, and in turn, their correspondent partners. Based on defined metrics, the profile can be straightforwardly updated when a customer’s information or wider circumstances change.

Furthermore, by storing pieces of data, the system will create an analytical overview of each customer. For instance, the software can determine an average unit price for any particular good a customer handles based on the trade documentation reviewed. A significant deviation in that price may indicate suspicious activity. In order to track this, the bank can introduce an alert if there is a deviation of more than 10% on any new transaction.

Furthermore, automating compliance checks helps to capture accurate data at the right time. Some trade finance transactions can take months to complete, given the duration of shipping. If sanctions checks are carried on a particular transaction while a vessel is still enroute – with deferred payment only due 30, 60, or even 90 days later – a lot can happen after checks are completed.

Daily monitoring would be impractical to take on manually, but by automating sanctions checks, it is possible. Banks can receive any breaches or alerts related to the transaction to ensure compliance. As such, AI is a crucial tool in carrying out the most demanding, and tedious compliance tasks thoroughly and reliably, freeing up staff to deal with more value-added tasks.

Mounting pressure on compliance teams has driven an impetus to make all forms of documentary trade finance checks – from know-your-client (KYC) to anti-money laundering (AML) – more efficient and cost-effective. Further to building a customer profile, an AI can detect missing or incomplete data captured during onboarding, helping to streamline the verification process to meet KYC requirements. If a sanctioned individual is detected in a trade document, a layered investigation can take place by running that name against the data available, and it is possible to find further useful information, including companies the individual is linked to.

New horizons for compliance checks: “know-your-vessel”

Meanwhile, the adoption of AI and analytics is helping banks to detect illicit and sanctions-breaking activities. New tactics, especially maritime fraud, have emerged to subvert the regulations. As a result, vessel checks in particular have taken on greater importance in compliance – evolving into a new area of “know your vessel” checks.

For example, a vessel associated with a sanctioned country may attempt to disguise its identity by adopting a false flag or “flags of convenience” in order to carry out illegal activity. Following the invasion of Ukraine, Russian vessel switched their flags overnight in order to avoid = sanctions that would block them from international ports. Identity laundering encompasses further tactics that disguise a ship’s true identity: zombie vessels, for instance, adopt the identity of a ship that has long since been scrapped. Alternative deceptive shipping practices seek to obscure a ship’s location: ships “go dark” by turning off their AIS transponder. This behaviour has recently hit headlines as a tactic to disguise the onloading of stolen Ukrainian grain at sanctioned Crimean ports.

It is key that banks, and indeed all stakeholders, are aware of the increasingly sophisticated sanctions-breaking methods. Technology, however, is well-equipped to keep up to speed with new and sophisticated tactics. AI can draw on historic vessel and shipping data to detect strange sailing patterns or suspicious changes in a vessel’s appearance. The system would create an alert if, for example, a 300-meter tanker made sharp turns in a narrow sea passage or a ship that was recorded as 275 meters is recorded again as only 225 meters long.

Such checks process a significant amount of data, with historic vessel checks going back six months or more. As a manual exercise, this would mean ploughing through files, collecting vessel names, and checking them one by one in a data provider. Considering banks process hundreds of transactions each day, this degree of oversight is essentially impossible without AI.

Technology helps banks stay up to date in a fast-evolving environment

When the first round of sanctions was announced in February 2022, banks that had already adopted AI-based automation for their trade finance processes were well-positioned to handle the volume of new checks. The software offers a high level of customisation for specific sanctions-related issues.  Instead of monitoring and implementing sanction updates manually, it is straightforward to keep watchlists updated and the system automatically adds new rules to screening and evaluation processes.

For instance, within 48 hours of Russia’s invasion, Conpend’s clients were provided with a specially developed script, upon request, enabling them to perform a keyword search across their portfolio. These helped to flag transactions associated with Russian ports, goods, entities, and vessels, providing crucial oversight on completed and ongoing transactions. What’s more, a digital solution creates an automatic audit trail, making it possible for a bank to demonstrate to regulators the checks they have completed.

Banks certainly cannot rest on their laurels. Due to the nature of the conflict, further revisions to sanctions packages are likely but unpredictable. Opting for comprehensive and adaptable digital solutions not only creates flexibility to deal with fast-moving developments but also enables better scenario and contingency planning abilities in the long term.

[i] https://www.reuters.com/legal/transactional/exploring-russian-sanctions-insurance-coverage-2022-06-22/