Seven months after the salvo of Western sanctions against Russia following its invasion of Ukraine on 24 February 2022, the pressure is not easing on banks' compliance teams. Pascal Aerens, co-founder and business developer of Neterium, a company that develops application programming interface (API) solutions for financial crime compliance, said in an interview: "In just a few days, the sanctions lists have increased by 25%. Our clients have never seen so many waves of sanctions, with so little reaction time." The fintech, located at the Luxembourg House of Financial Technology, has registered "a real commercial success this year".
While the European sanctions against Russia are already in their eighth round, it is not so much the length of the lists of targeted individuals and legal entities as the need for flexibility that remains a challenge for the banks. They have, for example, had to stop all transactions both to and from the Russian-annexed Donbass. But the tricky part is that this region is still known to be in Ukraine in the bank transaction monitoring systems. "Our clients have therefore asked us to block the Donbass, but not the rest of Ukraine," explained Aerens, who stresses the revolutionary aspect of such a request. “A regional rather than country-specific approach to surveillance is not something you find in traditional solutions designed with a view to 20 years ago.”
As soon as part of Ukraine's territory is liberated, it is necessary to ensure that financial transactions are possible again to support the Ukrainian economy.
However, the speed of the Ukrainian army's counter-offensive to retake its occupied territories reinforces the need for flexibility. "A city that was occupied by the Russians can come back under Ukrainian control overnight. So, as soon as a part of the Ukrainian territory is liberated, we have to make sure that financial transactions become possible again to support the Ukrainian economy," he explained. The company's responsiveness to this need of banks comes from its ability to convert a place name into geographical coordinates and to apply sanctions according to a geographical perimeter.
Read also
Diversity of flows
Sanctions are not only limited to names of individuals, but also affect industrial sectors such as Russian oil imports. The challenge is to be able to identify the financial flows related to such economic operations. But that is not all. In addition, there are many companies owned and controlled by Russian entities or individuals targeted by the sanctions. "These companies are not on the sanctions lists, but are indirectly sanctioned," noted Aerens. This is without taking into account the fact that their shareholding and control structures are often composed of multiple intermediate layers and third-party agents. However, "the research work must be done". For that, "having the right algorithms is one thing, having the right data is another."
Pascal Aerens describes the evolution of the architecture of banks' transactional flows, from the simplicity of domestic and international flows, to the complexity of the various payment methods. Photo: Matic Zorman/Maison Moderne
Beyond the lists of sanctions, Neterium, which just celebrated its five years of existence in September, is well aware of the constraints undergone by banks, which are obliged to continually strengthen their compliance functions. "In the past, banks' payment flows were extremely simple: on the one hand, the system of domestic flows, and on the other, international flows that went through Swift," said Aerens.
Such an architecture required few connection points for transaction monitoring solutions. However, "with the digital transformation that has diversified payment methods, the rails that make up the banks' operational processes have become much more complicated. This has naturally had consequences for transaction monitoring systems: “The number of connection points has multiplied. It is no longer enough to place a device in the centre that will capture the entire flow.”
With instant payments, we have to react within ten milliseconds. A lot of solutions designed in the past don't have that capability.
Another evolution linked to the digital transformation of banks: the instantaneous nature of certain payment methods has pushed credit institutions to turn to solutions capable of reacting in real time. "With instant payments, we have to react within ten milliseconds. Many of the solutions designed in the past do not have this capability," stated Aerens. "The few seconds that the bank has to process the payment are cut into very thin slices. Each player has its slice." With such a short response time, it is impossible to put the human element in the loop. The challenge is therefore to install "extremely reliable" artificial intelligence to prevent an irrelevant volume of transactions from being unnecessarily blocked.
Rationalisation of investments
For Neterium, the centralised technological solutions of yesteryear are no longer appropriate. "It usually takes six months of work to connect a traditional technology solution to a channel," he said. "Now, not only are there more channels, but it's always moving. API solutions are more flexible and better suited to today's needs.”
Aerens observed that banking institutions have accelerated their transition in this direction: "Covid has served as a real accelerator for the banks, because the financial sector being as it is, the transformation of traditional industry players to API or cloud technologies would have happened, but would have taken 10 years." The acceleration has been such that "at the executive level, no bank is going to laugh in your face anymore when you propose a cloud or API solution to them.”
Compliance is not a competitive field. Everyone is in the same boat.
However, the innovation in progress is not complete. The real revolution, in the eyes of Aerens, concerns above all the pooling and rationalisation of banks' compliance investments. "Compliance is not a competitive field. Everyone is in the same boat", he noted, explaining the initiative launched by GSS to create a transaction monitoring platform with the aim of seeing a common standard emerge. On 21 September, Neterium entered into a partnership with GSS to become a technology partner of the platform. Neterium will contribute its "transaction monitoring engine" alongside other partners who will feed the project with data lists.
"As GSS customers, banks will be able to outsource their transaction screening with the guarantee of an identical level of quality across the industry", he commented. The success of such standardisation could well strengthen relations in the correspondent banking segment, where the norm is still to monitor the same transactions several times, at each stage where they pass from one bank to another. Heavily regulated, banks do not want to take responsibility for a detection flaw at another bank.
This article was published for the Paperjam+Delano Finance newsletter, the weekly source for financial news in Luxembourg. . Read the original French version of this interview on the site.