Industry Official Hoping to Address ‘Enormous Inefficiencies’ in Banks’ Sanctions Screening

The U.S., Canada and other nations can make sanctions screening efforts by banks and other financial institutions more efficient by addressing certain privacy laws, said Stephen Alsace, global head of economic sanctions for the Royal Bank of Canada. If all financial institutions were able to share more information about certain transactions, it could reduce redundancies during the sanctions compliance process and allow payments to be screened and processed faster, Alsace said.

Alsace, speaking during a sanctions enforcement and compliance conference hosted by the Wilson Center this week, said much of the “friction” inherent in banks’ sanctions screening procedures is because a transaction often needs to be “rescreened by each entity over and over again.” For example, not only may the initiating bank need to screen a transaction against sanctions lists, but sometimes intermediary banks or beneficiary banks also need to complete their compliance procedures to clear the payment.

“Why do we do that? Because we don't really trust each other. Because we think, ‘Oh, we have different standards,’” Alsace said. “What does that result in? Enormous inefficiencies, and it also delays it.”

He said the Royal Bank of Canada has begun working with a “consortium service provider” -- composed of more than 40 other banks around the world -- to “look at doing things differently.” Under one potential solution, the originating depository financial institution would be the only entity that screens all “legs of the transaction” on behalf of each financial institution involved. This would require “all the participants to agree to that” screening standard.

“Setting a baseline standard that way can actually make sanctions screening more efficient, more effective,” Alsace said, “and it also helps with enforcement and compliance with sanctions requirements.”

But he said “getting agreement to allow the sharing of the information necessary along the pathway is critical,” saying privacy departments from the banks’ respective countries would “need to be engaged in this discussion.” Alsace stressed that “we're not talking about anti-competitive behavior here -- this is really efficiency for compliance.” It will help give a “solution for fintechs, money service business and non-banks to actually follow the same standards that banks have been following for the last two decades.”

Alsace called this “the future” of banking sanctions compliance, adding he’s had a “lot of success” in conversations with other banks about the effort. But “we'd like to see a bit more traction from participants in the United States.”

“We have to move in that direction,” he added, “because the costs of compliance are becoming excessive, and the difficulties and the challenges with compliance are also becoming more and more apparent.”

Alsace also touched on compliance challenges caused by what he said is the blurring of sanctions and export control regulations. He said many financial institutions have procedures in place to comply with Treasury Department sanctions, but banks are now increasingly being expected to make sure they don’t process payments for certain export-controlled items to Russia.

Doing export control due diligence on those payments can be challenging, he said. The U.S. and other countries have released a list of common high-priority goods that banks should be monitoring for potential Russia export control evasion risks -- including items listed under Chapter 85 Harmonized System codes (see 2309200031) -- but industry officials said the items listed are too generic for compliance purposes (see 2308150051).

“If you ever looked at Chapter 85, it's massive, right? It's basically electronics,” he said. “We understand the intent here, but the problem is the application,” because banks often aren’t given the same “rich” information about an item when they are processing a payment compared with the level of detail accompanying a physical export.

“That means we have to actually stop any type of payment that actually references electronics involving Russia,” Alsace said, adding that it’s “perhaps easier to just derisk and not process any transactions with certain countries because of the level of complexity that you have to implement.”