What is New?
In July of 2022, the Financial Conduct Authority (FCA) announced the introduction of a new SupTech tool for testing the efficacy of firms’ automated sanctions screening systems. The FCA aims to ensure that companies are properly implementing sanctions, especially in light of the broad sanctions placed on Russia in 2022. The new analytics-led approach assesses the effectiveness of sanctions controls using a synthetic data set of approximately 100,000 entities, which firms will ingest into their screening systems to test if they can accurately identify sanctioned entities.
Why is There a Change?
The primary driver behind this change is the limitations associated with traditional face-to-face and document-led supervisory approaches, which are resource-intensive and difficult to implement at scale. The FCA’s new approach aims to overcome these limitations by increasing both the scale and effectiveness of testing. The Russian invasion of Ukraine has accelerated this process, but the FCA signaled as early as 2019 that it was turning to technology to fight financial crime, including testing sanctions screening effectiveness.
The FCA’s new approach suggests an increase in regulatory scrutiny of sanctions implementation going forward. The Office of Financial Sanctions Implementation (OFSI) has shifted to a more proactive enforcement model, doubling its staffing profile and implementing a new “strict liability” test for assessing breaches of the UK’s financial sanctions regime.
The Impact On Firms
There are benefits to the FCA’s new analytics-based approach, but there are also challenges to be considered. This type of approach is not tailored and specific to each entity, so it is important to interpret the results correctly. Taking the results at face value can lead to the wrong conclusions.
To prepare for the FCA testing, entities need to cover three main areas:
- How to prepare for the testing,
- How to interpret the results, and
- How to explain the results to the FCA.
- Firms should be proactive in discovering potential testing outcomes independently to support them during FCA testing.
- Independent sanctions screening testing equips firms with a comprehensive overview of potential gaps in their screening set-up, technology nuances impacting screening outcomes, and a library of risk-based decisions impacting screening.
- When interpreting the results, it is important to understand that lower matching scores can sometimes be caused by genuine deficiencies in the systems, leading to under-generation of alerts.
- However, decreased scores are often related to technical execution of testing within the systems and can be resolved with a follow-up root cause analysis.
- Lastly, firms should be prepared to explain lower-than-expected scoring results to the regulator. Engaging competent external providers with appropriate testing technology and subject matter expertise ensures that testing results are authoritative and decisions impacting screening effectiveness are in line with regulatory requirements and fully explainable to the FCA.
If you have any questions or want to learn more about these changes, please contact us.
