The evolving and far-reaching landscape of sanctions, including recent developments related to the US Executive Order 14114, calls for action and new ways to detect and control risk. This poses more and more challenges for financial institutions. How can this complex issue be tackled, and how can sanctions risks, often purposefully hidden, be addressed in a timely manner? Technology systems using decision intelligence with the ability to understand risky connections at scale may be the answer to these evolving dynamic challenges.

Regulatory perspectives impacting Asia Pacific

The Asia Pacific trade finance market generated revenue of US$ 3,626.5 billion in 2022 and is estimated to reach a valuation of US$ 5,711.0 billion by 2030, growing at a CAGR of 5.9% during the forecast period of 2023-2030. The significant importance of trade and predicted growth underscores the necessity of robust sanctions controls to identify potential exposure to sanctioned individuals and businesses. The regional identification of proliferation financing is crucial, particularly in the geographical context of Iran and North Korea, and is a key focus for regulators, including the Monetary Authority of Singapore, who have identified proliferation financing as one of the key focus areas of the COSMIC platform initiative that is now live.

One of the most recent sanctions regulatory developments, OFAC Executive Order 14114, issued in December 2023, targets Russia’s military-industrial base and restricts dealings with the Russian central bank and other entities. It also expands import bans on certain Russian goods. This order significantly expands sanctions on Russia compared to previous executive orders. The key difference is that the order's target is much broader, encompassing not only Russia’s military, but also its central bank, key industries, and individuals. The complexity of the coverage is much greater, and understanding second and third-degree connections and risks becomes paramount, especially in the Asia Pacific region, where connections may not be obvious, and risks remain hidden among complex transactional flows, high-risk country corridors, and unusual transshipment routes.

The relevance of OFAC Sanctions in the Asia-Pacific region increased significantly after the US Treasury officials visited Singapore and Malaysia in May 2024. This heightened importance for compliance is mainly due to the sanctions imposed on Russia and Iran.

For instance, consider this statement, from a circular released by the Monetary Authority of Singapore (MAS) in August 2023:

“MAS has observed an increased use of data analytics (DA) by FIs in their detection of sanctions related risks in addition to traditional name and transaction screening controls. Such use of DA includes the use of network link analysis to identify additional customers with relational or transactional links to sanctioned persons, and potential sanctions evasion activities."

Thong Leng Yeng, Executive Director, Anti Money Laundering Department, August 2023

Consequently, Asia Pacific financial institutions can no longer rely on traditional name and payment sanctions screening solutions alone that can only identify surface-level list matches. The direct and indirect connections, along with other indicators such as the presence of certain jurisdictions and transactional patterns, reveal the true nature of trade and transactions. Sanctions circumvention is now truly a network issue. This has been recognized by the MAS, which acknowledges that network link analysis is one of the most trending technological innovations in the region and has tangible benefits in the detection of sanctions circumvention. Additionally, it was noted that financial institutions should review their AML/CFT frameworks and controls against the additional guidance set out in the August 2023 MAS circular and take steps to enhance their controls if any gaps are discovered.

Addressing regional sanctions challenges with technology

The sanctions landscape has evolved dynamically in recent years, especially since the escalation of the war between Ukraine and Russia in 2022. Sanctioned individuals and businesses have skillfully managed to change and obfuscate ownership, hiding real ownership through intricate trust structures and other special-purpose vehicles. This behavior is not unique to Russian sanctions evasion; it extends through to Iran and North Korea as well, including proliferation financing. The ownership of sanctioned businesses is skillfully hidden, requiring an understanding of social connections within the context. This understanding is not only based on commercial registry information but also behavioral analysis of the transacting counterparties, both current and historical.

The technology addressing these challenges needs to be based on clear and specialized data resolution, the creation of a single customer/counterparty view, and an understanding of network connections of the sanctioned entity, as well as the ability to use machine learning and contextual scoring to identify anomalous payment/goods flows and connections. Entity resolution, network generation, and graph analytics are the key components of a solution that addresses the challenges posed by evolving sanctions regulations around the globe. Network generation is probably the most crucial, as it identifies hidden relationships in transactional and non-transactional data. However, without the foundation of data and a single customer/counterparty view, network generation will never be accurate enough.

Using Decision Intelligence for sanctions circumvention and export controls

Quantexa's solutions for sanctions circumvention and export controls use its Decision Intelligence Platform to build the data foundation necessary to understand the intricate connections between entities with confidence, trust, and clarity. Quantexa then overlays the network and incorporates activity-based risk pertaining to specific sanctions typologies with defined detection scores based on profiling trade and transactional activity.

Discover more about Quantexa's financial crime solutions that can be applied to sanctions circumvention and export controls.