Building on sanctions against Russian oligarchs and political leaders in response to the country’s war in Ukraine, the U.S. is now looking to keep technology that can be used for military purposes out of Russia by requiring banks to decline or report transactions that appear to relate to such exports.
The Financial Crimes Enforcement Network (Fincen) and the Department of Commerce’s Bureau of Industry and Security (BIS) jointly published an alert June 28 that implored banks to impute greater risk to transactions involving a list of items such as airplane parts, cameras, and antennas that could help Russia and its ally Belarus bolster their military capabilities. The full list is available in
The alert, which regards export controls rather than the broader matter of economic sanctions, presents dual challenges to banks of risk and compliance, according to experts. First, banks must properly calibrate the level of risk they assign to transactions that involve the commodities listed in the Tuesday, June 28 alert.
Secondly, banks must properly calibrate the software they use to monitor transactions for financial crimes to ensure they comply with the alert. These systems sometimes monitor for more than export control or sanctions violations and extend into money laundering, fraud, illicit drugs, and other crimes.
Clark Frogley, Americas head of financial crime solutions at the London-based software company Quantexa, said the challenge of responding to alerts such as the one issued Tuesday “is extremely tedious and resource-intensive” for financial institutions, “and most people who work in this area are extremely busy right now.”
Export control technology has some similarities to anti-money laundering and fraud prevention, according to Frogley, as they “are all monitoring information against a set of rules and scenarios driven by red flags.” But, there are some major differences.
The agency recently updated a policy document to include technological innovation as a top priority and said it was considering creating a safe harbor for those who develop new products to fight financial crimes.
“Outside of credit card fraud, most fraudulent behavior is also not identified in real time, but after an alert is raised and an internal investigation has taken place,” Frogley said. “Credit card fraud does require real-time interdiction of payments but is often treated as an operational risk to the business. As long as they can keep fraud below a set threshold, [card issuers] feel they are doing OK.”
Like credit card fraud, export control and sanctions screening must happen in real time, but financial institutions have much higher standards for the level of error those screening systems have.
“That makes it a bit more challenging and often resource-intensive, depending on the number of high-risk customers and type of business an institution has,” Frogley said.
When the government asks for greater scrutiny from banks, this magnifies the challenge. Far from being able to simply turn a few knobs, many banks must commit personnel to responding to changing mandates from regulators such as Fincen and BIS.
“When an alert like this is released, each institution must manually turn up the scrutiny for customers that fall into these categories as well as all customers dealing with transactions associated with the alert,” Frogley said.
Though it's not a panacea, automating transaction monitoring offers major benefits to institutions that do so, and not every benefit necessarily comes from artificial intelligence, Frogley said. Some technologies “allows screeners the ability to connect data points spread across multiple systems about these individuals into a single view,” according to Frogley. He named entity resolution and network analysis as two such technologies.
But more important than the tech involved in transaction monitoring are the people and processes behind them, according to Eric Young, senior managing director at Guidepost Solutions, an investigations, compliance and security consulting firm.
“Smart artificial intelligence and robotic tools are only as good as the people reviewing and escalating alerts,” Young said. “Automation is a means to an end and a tool which must be used correctly to drive human decisions.”
As for why the alert has come out now, months into the war, Gene Burd, a partner specializing in international disputes at the law firm FisherBroyles, pointed to a number of recent meetings of international leaders who together have promised additional economic and financial pressure on Russia.
“It’s hard to assess” the impact that economic sanctions have had, according to Burd, “but there is a tremendous amount of financial issues now impacting Russia.” Burd pointed out that
