Sanctions Spotlight Brochure

SANCTIONS SPOTLIGHT SERIES

20YEARS OFF ILTERING INNOVAT ION

CELEBRAT ING

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TABLE OF CONTENTS

EVOLVING SANCTIONS LANDSCAPE

FILTERING INNOVATION AT FIRCOSOFT

FIRCOSOFT’SUNIQUE FILTERAPPROACH

FIRCOSOFT’SHERITAGE AND HISTORY

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“By nature, our products are extremely linked to the political situation. And as the usage of sanctions as a foreign policy enforcement tool increases, this dependency only deepens. Currently we are obviously monitoring the situation in Ukraine very closely, as well as monitoring changes in sanctions in Iran, the situation in Africa and in the Middle East, because it will result, or could result in changes in sanctions programs – and we have to be ready before our customers ask us to change either our content or our applications.”

Complying with sanctions regulations to protect your financial institution against risks, fines and reputational damage is increasingly a challenge given the lightning pace of regulatory changes in the recent months. There are a number of important new trends for financial institutions to consider regarding how sanctions and their enforcement will evolve.

VELOCITYThe velocity of sanctions is higher and higher. Sanctions can become active extremely rapidly: taking, in some cases, days between the moment sanctions are threatened and when they are enforced. To remain protected, banks have to be capable of fast and flexible deployment.

COMPLEXITYSanctions will be extremely specific and complex. No longer is a whole country sanctioned, like Iran, Cuba, or North Korea where it is straightforward: stop all payments to these specific countries. With the new Russian sanctions, financial institutions must stop payments to these targeted individuals and the entities that they directly or indirectly control. With these new sanctions, financial institutions are


Pascal AerensHead of Product StrategyFircoSoft


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going from a situation where sanctions are quite straight forward and simple, to a situation where it is quite complex – as some operations are going to be forbidden and others authorized, adding a lot of additional work for the embargo teams in the banks.

As an example, there is a specific rule in the Russian sanctions which indicates that any affiliated person or entity with more than 50% of ownership is also to be considered sanctioned –even if this entity is not on the OFAC list. This means that there is a huge impact on KYC and due diligence for financial institutions. Financial institutions will need to put in place increased levels of controls to ensure they do not process payments with these entities that are indirectly sanctioned.

NEW CONTROLS

Another element, as revealed by the recent fines imposed by OFAC, is the growing importance of being able to exert and demonstrate internal controls, particularly against the removal of offending text, a technique usually referred to as transaction stripping. The common element of the latest fines is that they all include some reference to that practice. Banks will need to boost their controls and prove to regulators that the right technologies and practices are in place to reduce this risk.

“The evolution of sanctions against Iran and Russia will be divergent. On one hand there are negotiations between Iran and the international community about the nuclear program - if they reach an agreement it will likely partially lift the sanctions. On the other hand, with the crisis in Ukraine, the Russian federation is threatened with more international sanctions. Sanctions programs are more and more being an international political tool – this is due to the fact that trade is worldwide and very interlinked – leading to higher impact of economic sanctions.”

Rene WackCompliance Officer

FircoSoft

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COMPLIANCE COST REDUCTIONWith faster, more complex regulatory environments on top of growing transaction volume, the operational cost of compliance has grown to a point where it has become significant. To stay competitive banks are looking at ways to reduce this cost. Software cost is minimal compared to cost of personnel. Banks therefore should look for technologies, such as those with increased automation and auto-resolution in order to reduce compliance costs.

Are You Protected Against Wire Stripping?Stripping is intentional misconduct, internal or external, that involves the practice of removing wire transfer information such as customer names, bank names, vessels and addresses to deceive detection systems and evade economic sanctions detection. Because of the information removed from the wire, financial institutions are at risk of processing transactions that are not allowed by economic sanctions programs. Numerous fines have been given to financial institutions that have not had proper controls in place to detect payments that have been stripped. By adding a tool for detecting stripped wire payments, banks will improve their risk controls, reduce manual effort to stop stripped transactions, and automatically stop a stripped transaction before it is processed. With the risk of fines, penalties and a bank’s reputation at stake, it is crucial that financial institutions adopt procedures and safeguards to help ensure compliance.

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Are you Controlling Your Compliance Costs?With increasing transaction volume due to acquisitions, business growth or new regulations requiring filtering of domestic transactions, financial institutions are facing new workload demands that can impact compliance operations and potentially escalate personnel costs.

FircoSoft innovated and released Decision Reapplication, an auto-resolution feature to dramatically increase productivity of transaction screening. Leveraging the expertise of operators, Decision Reapplication automatically replays previously made decisions, which significantly reduces the number of messages requiring review, while allowing a faster release of payment transactions.This capability is particularly valuable when filtering domestic recurring payments (such as ACH, and pensions payments), and provides the ability to easily control when and how decisions should by reapplied. Utilizing this capability, a customer was able to process 20 million transactions in approximately 1 hour, enabling the reduction of 420,000 transactions to be manually addressed daily.

FircoSoft designed the Decision Reapplication feature with all safeguards to ensure that Decision Reapplication is safe – settings can be adjusted to align with the risk appetite of the bank.

Manual decisions for high-risk transactions(international, new)Decisions

Reapplicationon low-risktransactions(domestic, recurrent)

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Decision Reapplication Automates 70% of Decisions

DECISION REAPPLICATION AUTOMATES 70% OF DECISIONS

FILTERING INNOVATION AT FIRCOSOFT

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Over the years FircoSoft has adapted to the increased globalization of sanctions and continuously sophisticated its technology accordingly. Over the course of the last decade, FircoSoft perfected multi-alphabet support in the filter. First, it added the capability to filter non-Latin alphabets against each other, like Arabic against Arabic or Korean against Korean. Later, FircoSoft progressively introduced transliteration mechanisms to filter non-Latin alphabets against their Latin equivalents. The first language to be transliterated was Russian in 2006, followed by Greek, Arabic and Japanese between 2007 and 2009. Chinese transliteration was introduced with the latest release, in June 2014.

In addition, the capability to deploy multiple filtering processes in parallel represented a leap in scalability, enabling the management of massive customer files and rapidly growing PEP lists. A defining change in the latest release is the scoring engine that allows business users to assign a meaningful score to detections and to fast-track high-risk alerts in the decision making process.

FILTERING INNOVATION AT FIRCOSOFTFILTERING

INNOVATION AT FIRCOSOFT

Translation and Transliteration ExplainedTranslation is about languages and expressing meaning, which means about telling or writing the same thing in different languages, e.g. Germany, Allemagne, Deutschland refer all to the same country, and need to be referenced in a dictionary in order to match against each other. Transliteration is about alphabets and how to represent sound or pronunciation of each character from one alphabet by a character from another alphabet. In our case, Latin is used as a pivot language, all alphabets being transliterated to Latin, which enables the filtering of Russian Cyrillic against a Japanese list in Katakana, or Arabic against a Greek list, for example.

FIRCOSOFT’SUNIQUE FILTER APPROACH

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FircoSoft’s filtering approach is based on 20 years of close collaboration with its customers and continuous feedback on its filtering solutions. This accumulated experience enables the filter to be extremely performant, sensitive and resilient today.

The performance of the filter made its reputation, as every day hundreds of millions of transactions flow through it; now it has become a critical part of operational processes, everywhere in the world.

The filter’s detection algorithms are based on sophisticated linguistic techniques, which allow targeted filtering in accordance with Compliance policies, local and global regulations, and each customer’s individual risk appetite. Simple filters rely on statistics to compute similarities, and linear thresholds to trigger or not alerts for manual review. The Firco Filter uses a flexible approach to address the challenge of not missing any relevant hit on the one side, while controlling the operational costs of manual alert reviews on the other side. Powerful tools are provided to reduce false positives and prioritize high-risk alerts within the customer’s context.

Another unique feature is the filter’s resilience, making it independent from the exhaustiveness of referential data. Transliteration is an added value, avoiding the need to manually enrich lists with dozens of synonyms that are just the same entity in other alphabets.

FIRCOSOFT’S UNIQUE FILTERAPPROACH

“Our filtering approach is based on 20 years of close collaboration with our customers and continuous feedback on our filtering solutions. This accumulated experience allows the filter to be extremely performant, sensitive and resilient today.”

Kristina LaceteFilter Engine Product Manager FircoSoft

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Conquering the Challenging Balance of Risk and CostSince its inception, FircoSoft has partnered closely with its customers with a mission in mind – to provide full and complete protection against risk. As the Company celebrates 20 years of filtering innovation, that mission has been proudly safeguarded while evolving its solutions over the years to keep ahead of regulatory and operational requirements.

FircoSoft conquers the balance challenge by delivering optimal risk protection while providing full control of compliance costs through the development of new efficiencies and automation, new technologies to manage larger volumes faster and more accurately, and seamless connectivity tools for more rapid deployment and easy maintenance.

FIRCOSOFT’SHERITAGE AND HISTORY

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In 1990 a team made of technology professionals coming from artificial intelligence and natural language skills and business came to the company to start working on software components. FircoSoft delivered those components dedicated to the SWIFT traffic in order to ease the automation of processing SWIFT transactions. That was for FircoSoft, the beginning of entering into the financial business.

In 1993 FircoSoft met with a financial institution that was very interested in this STP technology. This same year the solution was deployed and it was a success. STP rates were excellent, and the customer was very satisfied, finding the technology both interesting and innovative. At the time (the early 90’s) it was not so common to use artificial intelligence or natural language technology in the banking industry.

With the success of this project, the customer came back to FircoSoft asking if it could help with a different challenge. Coming from the STP activity, FircoSoft started to work on filtering – as this customer was getting pressure from the sanctions program for Cuba –and the Cuban embargo from the U.S. - and they were looking for a solution to help them catch these transactions.

In 1994, FircoSoft successfully deployed the new solution (named OFAC Agent at the time), and that was exactly the start FircoSoft. The Company is proud to count this financial institution as a customer for sanctions filtering today – proving that since the beginning, and until today, FircoSoft continues to innovate and listen to customers and market needs.

FIRCOSOFT’S HERITAGE AND HISTORY

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From 1994 to 2001, the business was mainly North American. In the global banking industry, the industry was mostly speaking of Bank Secrecy, and looking at the contents of transactions. Then came 9/11, and with it a completely new regulatory landscape emerged, with new and tougher requirements for financial institutions.

With 9/11 and the extension and globalization of sanctions, FircoSoft had to evolve and make the technology meet filtering requirements, but also take care of different laws in different countries – and propose a solution tailored to what is applicable for each financial institution – while always protecting the institution. As experts in detection, FircoSoft’s approach has always been to identify every possible risk, and have the financial institution decide which alerts to eliminate, thus matching its specific risk appetite.

“Evolution and Innovation must always have the focus on customer needs and the market needs.

We have been very close to our customers – and this is what has made all the difference.”

Jean LoscoCEO FircoSoft

Technology

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