Securities screening and its role in financial crime mitigation

By Ashley O'Reilly

Custodian Banks are used by their customers for the safekeeping of proprietary and third-party interests in securities; the settlement and clearing of securities trades; ancillary services including corporate action processing; securities lending and collateral management.

Many Custodian Banks are complex global institutions and are not immune to the increasing risks associated with financial crime. The screening of securities (i.e. financial instruments) by Custodian Banks is an aspect of financial crime mitigation that is receiving increasing airtime in many Custodian Bank's boardrooms.

There is currently no regulation that specifically addresses financial crime in the Securities Services industry, however the ISSA (International Securities Services Association) principles provide guidance and improved financial crime compliance clarity.

Some Banks in Asia are compliant with the ISSA principles, however industry-wide compliance remains moderate and the maturity of securities screening practices is varied across the industry.

Custodian Banks in Asia should consider improving their securities screening processes and tools. At present, a wide variety of tools, data types, and processes are leveraged to different degrees to screen securities.

Norkom is a commonly chosen securities screening tool. Ficrosoft and WorldCheck are other popular tools. The current landscape may change as Custodian Banks upgrade their asset screening infrastructure.

Electronic screening is recognised as the most efficient and cost-effective method, yet manually checking is still common practice. Security information, not limited to trustee and business registration numbers, company and issuer holder names, and business registration numbers can generally be screened electronically.

Alert notices (e.g. from national departments of foreign affairs and trade) and sanctions restricted ISINs (e.g. SDN blocks, SSI rejects) are more commonly screened manually. The degree of automation is dependent on a number of variables including the tools available and asset types.

No single sanctions list has been universally adopted by the industry. Most Custodian Banks consider negative news instances related to issuers as trigger events for further review, however Custodian Banks in Asia typically do not conduct negative news screening against instrument issuers or other securities information held.

Instrument identifiers are typically screened against the OFAC Sanctions/ SDN Lists and/ or the UN Sanctions Ordinance and List of Names for Suspicious Account Reporting.

Most Custodian Banks conduct ongoing periodic monitoring of their securities, however the frequency ranges from daily to annually depending on the institution and the product being screened. A Global Custodian Bank headquartered in Australia screens instruments when facilitating transactions pre-settlement and not when instruments are initially transitioned in with new clients.

Most Custodian Banks screen securities at the time of instrument and/or client onboarding. Securities involved in large value corporate actions are often screened. Most Custodian Banks send sanctions hits to a separate team (within legal, compliance and/or risk) for a parallel SAR investigation.

Custodian Banks should work in collaboration and embrace the evolving higher market standards relating to the screening of securities to mitigate the risks associated with financial crime.

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