The Importance of a more Rigorous Approach to Counterparty Screening

The news the US has imposed new sanctions on Iran’s biggest shipping company and largest airline for allegedly helping Tehran develop ballistic missiles in contravention of UN sanctions will have made London market insurers sit up and take notice. It was reported Mike Pompeo, US secretary of state, announced sanctions on the Islamic Republic of Iran Shipping Lines (IRISL) and its China-based subsidiary, E-Sail Shipping, as well as Mahan Air.

The move is meant to “put the world on notice those who engage in illicit transactions with these companies will risk exposure to sanctions for themselves”, Pompeo said. At about the same time, the Senate foreign relations committee voted to advance sanctions against Turkey following its military offensive in northern Syria and for its purchase of a Russian-made missile system.

The proposal would penalise Turkey’s leaders, energy industry and financial system involved in military action in Syrian territory controlled by the Kurds. In recent years financial institutions have been fined billions of dollars for violating US economic sanctions.

In the insurance market, the US subsidiary of Dutch trade finance insurer Atradius agreed to pay more than $345,000 to settle allegations it violated US sanctions. It was fined for allegedly buying and collecting the debt of a blacklisted entity. As organisations such as insurers are held to higher levels of accountability in the prevention of financial crime, they find it a challenge to complete highly manually intensive tasks, such as alert reviews, in a timely manner.

Screening

According to PwC, an increasing number of companies require screening and a corresponding increase in the volume of transactions. Names and aliases on sanctions lists have increased approximately 20% each year, raising the number of alerts requiring review. Securing insurance is key to North Korea’s ability to move sanctioned or restricted goods around the world.

According to a Royal United Services Institute paper on sanctions evasion, recent high profile cases of vessels involved in ship-to-ship transfers of diesel and crude oil to North Korean tankers, in violation of UN Security Council resolutions, highlight the importance of insurance coverage in facilitating these operations.

The US Department of State, the UN and the Financial Action Task Force, the global standard setter on government responses to financial crime, have all highlighted the role of insurance in implementing sanctions against North Korea. London is the home of global maritime insurance.

It is therefore expected to play a central role in global sanctions implementation and in the disruption of North Korea’s illicit commercial networks and activities. Just as banks have begun to enhance scrutiny to anticipate the vulnerabilities of both their activities and their clients to abuse for proliferation purposes, so too should similar assessments feature on the financial crime and compliance agendas of insurance companies, brokers and their regulators.

London market insurers, in particular, face numerous compliance challenges owing to increased regulations, the growing size of their book of businesses and problems with inefficiency mitigation. Anti-money laundering (AML) and sanctions compliance mean insurance carriers need to have systems that are quick and proactive to stay ahead of the curve. Such tasks can be highly manual when it comes to alert reviews and the clearance of transaction processing.

In the face of increasing regulatory scrutiny and sanctions risk exposure, many insurers continue to rely on out-of-date technology and inefficient manual processes that create inaccuracies or duplication. To overcome these challenges, insurers and reinsurers’ claims departments should integrate automated solutions into their technology infrastructure.

Multiple data sources

The London market as a whole tends to struggle with integrating multiple data sources during the sanctions screening lifecycle, which results in increased errors and inconsistencies. Compounding the problem is the fact that insurance industry standard service level agreements and government regulations mandate that transaction processing and screening processes need to be conducted within a relatively short time period.

The old methods of sanction screening cannot keep up with modern business demands. However, insurers that adopt automated sanctions tools can start to proactively respond to increased volumes and regulatory expectations. They can also benefit from increased efficiency of end-to-end processing with more automated data transformation while reducing manual data entry. Claims teams have been signalling for some time they need to produce a higher percentage of alerts captured by using more accurate data. They also want to reduce the high numbers of false positives and duplicates due to screening irrelevant data.

Quality assurance and transparency are important in an environment in which slow and fragmented, often paper-based, audit trails exist. The next objective is to reduce potential resource and operating costs by automating processes such as data extraction, manipulation and analysis.

As is often the case in London, claims departments tend to lead the way in developing innovative technology-led solutions – for example, ECF2 Write Back – and it should be no different in the sanctions compliance arena.

There is a need for integrated compliance and audit sanctions checking of beneficiaries at the point of payment within Lloyd’s, the International Underwriting Association and non-bureau for settled direct claims within systems. That would point adjusters to add the beneficiaries of payment to the sanctions screen.

External sanctions systems

A claims management portal can be integrated with external sanctions systems to add beneficiaries, either categorised as an individual or organisation, so in the event no beneficiaries are highlighted on a bureau or non-bureau claim, the system would add that entity and send a sanction check request to the compliance team.

If the search returns a name, it would be assumed it is a fail because if the named entity were not a sanctions concern it would not be on the list and would not return the hit. The system would then block the processing of that payment and present the compliance team with the results and list of hits. Because there could be false positives, the claims adjuster would have the authority to upgrade the status to pass so they could now send the payment.

This could also be recorded on audit trails so we can see sanctions check responses when they have been updated. Sanctions technology is being developed to mitigate inefficiencies and avoid fines for violations of economic sanctions. Further down the line, optical character recognition, native language processing, robotic process automation, artificial intelligence and machine learning could be at the forefront of technologies to mitigate sanction risk.

For now, however, the unique structure of the insurance industry – such as the division of labour between brokers and insurers – means there is a heavy reliance on clients’ information being passed down from other parties, rather than compliance officers interacting directly with clients themselves.

This reliance, as the Royal United Services Institute has explained, limits the level of insight into the risk, and as a result, the ability to conduct further analysis into specific clients or due diligence concerns that may present a proliferation finance threat.