The FCA and Sanctions Monitoring

At this week’s XLOD event in New York, the FCA’s Executive Director of Markets, and Executive Director of International, Sarah Pritchard, made this speech outlining, among other things, how it has observed firms responding to and building their sanctions systems in response to the ongoing Ukraine conflict.

The FCA has a new synthetic data tool that allows it to directly test firms systems for screening names that are on the UK’s Office of Financial Sanctions Implementation (OFSI) consolidated sanctions list. Through its roll out of the tool, the FCA identified several gaps in firms’ sanctions testing as follows:

• Governance and oversight of sanctions systems and controls was not clear or effective in some firms;
• Firms are over-reliant on their third-party providers, and they are not properly making sure that their systems are tailored to meet business requirements;
• In some cases, systems were not able to generate alerts against known names on the sanction’s list issued by OFSI;
• Most firms were able to demonstrate that their systems incorporated some form of fuzzy matching logic that took into account different variables but this was with varying degrees of success in generating alerts; and
• Some firms had systems that generated a high percentage of false positives, that made the new process inefficient and raised the risk of errors.

On a positive note, the speaker commented that some firms had controls in place to measure the effectiveness of their system's parameters and threshold through sample testing and tuning, and they deemed that these are more effective as they are capable of adapting to changing risks.

The FCA notes that sanction systems are not just ‘plug and play’ – they need to be calibrated based on customer profiles and associated risks.

In terms of first line controls and responsibilities, Ms. Pritchard posed several questions firms should review:

• If you are in the first line, do you know how frequently your controls are reviewed and adapted?
• Do you review your controls whenever patterns of fraud or other threats change - like the partnership that needs to exist between first and second line of defense in firms to fight financial crime and build confidence in the financial system? 

 RegTrail Insight

Those compliance professionals overseeing sanctions screening and customer onboarding will benefit from reading the speech text in full as Ms. Pritchard shares the FCA’s expectations on a firms’ ability to monitor sanctions.