Efficiency and compliance
The IPR brings a host of positive changes to compliance departments , and the first of these is the time saved .
The transition to customer-based screening reduces the burden on compliance analysts by eliminating the need to manually handle false positives flagged for sanctions . While false positives from money laundering and other financial crime monitoring will persist , this approach removes an entire layer of unnecessary reviews .
However , customer-based screening is not impervious to false positives . Fuzzy matching , or the technique used to identify potential matches between sanctions lists and customer names , even when there are slight variations in spelling , typos or formatting , can generate a host of misidentifications . 11 PSPs will need to create white lists to reduce this occurrence .
Once customer-based screening has been optimized , the second positive change is the reduced reliance on manual processes . By eliminating the layer of transaction-based screening , compliance analysts can minimize human errors .
The final benefit is the incentive to enhance customer data quality . Customer-based screening encourages PSPs to maintain accurate and up-to-date records of their clients and improves the effectiveness of sanctions screening by enabling more precise identification of sanctioned individuals or entities .
Navigating obstacles
With benefits come challenges . For example , achieving IPR compliance may be particularly difficult for smaller PSPs . Budget constraints , shortage of resources , knowledge gaps and lack of time can make implementing the regulation burdensome for many . The short-noticed deadline of January 9 , 2025 , to comply with the new sanctions screening rule did little to help . 12
A survey by RedCompass Labs , a U . K . - based consultancy specializing in payments , found that European banks plan to invest between 1 million euros ($ 1.04 million ) and 3 million euros ($ 3.11 million ) in new technology to meet the standards posed by the IPR . 13 As the resources needed to implement such
technology can already be taxing for major financial institutions , one can imagine what it is like for smaller PSPs .
Another issue is that the instant access to an organized source of sanction information was not available to PSPs prior to the introduction of the IPR . 14 Sanctions lists were acquired through third-party providers and updated versions were sent to the PSPs either at regular intervals ( e . g ., weekly ), or ad hoc . This means that both PSPs and sanctions list providers will have to overhaul their processes and infrastructure to be compliant with the regulation , adding to the burden .
The elimination of transaction-based screening also raises the question : What if a sanctioned name is added to the payment reference ? For example , individual A , who is not sanctioned , sends money to individual B , who is also not sanctioned , and adds as the payment communication the name of a sanctioned individual or organization . How will this be captured by AML analysts ?
As payment references could potentially contain critical information that links a transaction to a sanctioned individual , entity or activity , this creates a compliance gap .
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