In today’s regulatory landscape, financial institutions are under increasing pressure to make their sanctions screening processes transparent and explainable. This “explainability” has become crucial for compliance and risk management. But what does it really mean and how can your institution prepare?

Explainability: Peeling Back the Layers

At its core, explainability is about illuminating the black box of your compliance processes. It is the ability of a firm to describe to stakeholders – in particular, regulators, internal auditors, and board members – how an individual compliance process produces its decisions and outcomes. Initially focused on technology systems, like sanctions screening software, this concept has broadened. Now, stakeholders expect transparency across the entire compliance process because technology is just one piece of the puzzle.

The 5 Questions That Will Make or Break Your Explainability

To be prepared for regulatory scrutiny, firms should ask themselves the following critical questions:

1. Do We Have a Documented Risk-Based Framework?

• Why it Matters: A well-documented framework explains the rationale behind your screening rules and how you handle alerts, directly linking these choices to your firm’s specific risk exposure.

• Action Point: Ensure that this framework is thoroughly documented and easily accessible.

2. Do We Understand Our Screening Technology Inside Out?

• Why it Matters: A deep understanding of how your technology operates prevents reliance on a single expert (avoiding key person risk) and ensures that knowledge can be transferred within the organisation.

• Action Point: Document the technology’s functionalities and maintain updated training materials.

3. Is Our Data Governance Robust?

• Why it Matters: With data coming from multiple sources, it is crucial to document data origins, usage, and protection measures, especially concerning personal data used in screening.

• Action Point: Implement strict data governance policies and keep records up to date.

4. Can We Explain How Matches Are Made?

• Why it Matters: Being able to articulate the decision-making process of your software – including any AI-driven elements – is vital for transparency and compliance.

• Action Point: Document the matching algorithms and any changes made during software updates.

5. How Is Our Software Calibrated and Reviewed?

• Why it Matters: Regularly reviewing and updating your software configuration ensures it remains effective and compliant with current regulations.

• Action Point: Keep detailed records of configuration settings and review schedules.

The Documentation Imperative

Remember: If it is not written down, it might as well not exist. Thorough documentation is your best defence against key person risk and inconsistencies.

Choose Technology That Empowers Explainability

The most significant explainability gaps often stem from a lack of understanding about the screening technology itself. When selecting a sanctions screening solution, prioritise vendors who build explainability into their core offering. Look for transparency around:

• How the technology functions

• Data governance support

• Alert generation decision-making

By focusing on these areas, you will be well-equipped to meet the growing demands for explainability in sanctions screening. Don’t wait for regulators to come knocking – start strengthening your explainability today.