The Importance of Conducting a Sanctions System Model Validation

The post-Brexit era indicates an increasingly evolving UK Sanctions landscape. The Sanctions and Anti-Money Laundering Act 2018, in addition to the UK Global Human Rights Sanctions Regulations 2020, gives the UK government authority to implement its own sanctions regime. The UK has witnessed some of the largest penalties that relate to sanction breaches, illustrating the importance for UK financial institutions (FIs) to ensure regulatory compliance. Furthermore, internationally, there has been an increased emphasis on technology, as reflected in the focus on technology in the Anti-Money Laundering Act of 2020 (AMLA) in the US. AMLA Section 6209 requires US regulators to promulgate a rule specifying standards for FIs and testing of compliance technology. The standards call for risk-based testing, oversight, and other risk management approaches of the regime, prior to and after implementation, to facilitate calibration of relevant systems and prudently evaluate and monitor the effectiveness of their implementation. Such international developments could influence similar changes in UK regulations and UK regulators could come to expect FIs to conduct model validations on their sanction systems. 

What Does This Mean for Financial Institutions?

A model validation is a critical component of the risk management process that enables FIs to better understand screening systems and the surrounding processes and procedures. It goes beyond testing the effectiveness of fuzzy matching capabilities of the filter. A model validation examines four components that provide UK FIs an overall rating of the model:  

Identifying limitations, issues, or gaps should not be considered a negative scenario. It places FIs in a strong position to demonstrate they are in control of their systems through the identification of the gaps and evidence of action plans or additional controls to support remediation.

Moreover, a model validation review will offer FIs an opportunity to understand  high risk areas of focus, foundations to support ongoing monitoring, and opportunities to enhance existing processes and procedures.

What You Should Do Right Now

Guidehouse can conduct an independent model validation or provide an independent review of the bank’s model risk management team’s assessment using experienced sanctions system specialists. In addition, Guidehouse can provide holistic services related to customer due diligence, sanctions screening, and transaction monitoring technology solutions. Guidehouse assists institutions to deliver proven and practical cutting-edge technology solutions that pass regulators’ scrutiny, while improving effectiveness and efficiency in detecting and investigating suspicious behavior and sanctions violations. Guidehouse partners with clients to implement and calibrate appropriate financial compliance technology solutions and provide proper governance, oversight, and controls of these solutions.

Guidehouse has in-depth knowledge of the regulatory environment, both in the EU and globally, and FI processes. Guidehouse’s relevant expertise includes the following: 

• Model Validation 
• Data Governance & Validation
• Model Governance Setup
• Robotic Process Automation
• Machine Learning-Driven Alert Dispositioning 
• Entity Resolution & Network Generation
• Intelligent Segmentation 

Guidehouse’s financial crime consultants work with FIs of all sizes to build effective and efficient risk management and compliance frameworks to help clients protect against legal, fiduciary, shareholder, and reputational risk. Guidehouse experts include distinguished former prosecutors, regulators, compliance officers, and consultants, who leverage their combined experience to help clients conquer their compliance challenges.

Special thanks to Sajeev Kanagarajah for contributing to this article.