5 Facts Of Watchlist Screening To Focus In 2024

Transformation of due diligence practices against global financial threats of money laundering and terrorist financing have always been a stretching task for the prominent players of team good guys including law enforcement, regulatory bodies, and institutions. Raising a question on the efficiency of anti-money laundering (AML) regulations that see no pause in the compliance landscape, institutions paid $26  billion of AML enforcement price in the last decade. Where watchlist screening and sanctions check seems reliable AML measures, the staggering amount of global AML/KYC (Know Your Customer) and sanctions non-compliance fines push the MLROs and institutions to deeply look into the future of watchlist screening and sanctions list check.

This digital piece of paper will walk you through the multi-dimensional regulatory landscape of AML and explore the inevitable facets of global watchlist screening while focussing on the five major things every MLRO should be aware of. Before digging deeper into the intricacies of screening processes and tools, let’s take a quick look at basics of AML compliance.

What is Watchlist Screening in AML Compliance?

Identification of corrupt actors from consolidated and global lists of money launderers, terrorist financiers, sanctions entities, and fraudsters who can potentially harm the global financial integrity is done through watchlist and sanctions checks. The strict AML compliance atmosphere demands institutions both financial and non-financial to verify their customers if their name appears on any watchlist to avoid non-compliance to AML/CTF (combating terrorist financing) which can result in reputational and primarily monetary and legal penalties.

Meeting the compliance requirements is undoubtedly a challenging task where a small negligence can cause hundreds of thousands while staining the reputation of internationally recognized firms. For instance, Microsoft corp. agreed to pay a civil money penalty of $3.3 million for committing around 1300 sanctions violations by providing services to sanctioned entities in Cuba, Iran, Russia, and Syria. Proactive approach to screen and monitor your clients and business partners in a unified effort to stem financial crimes and compliance breaches enables institutions to meet the evolving regulatory demands.

Read more about watchlist check and how it can help you to foster a global business with minimal AML risks exposed.

The effectiveness of your AML/CTF compliance program by means of watchlist checks relies on the sources and lists to screen from, which are comprehended below.

Traditional Watchlists To Be Aware Of

To enforce enhanced due diligence (EDD) and AML watchlist screening, global regulatory and law enforcement authorities have publicized watchlists of criminals and sanctioned entities. Some of the globally recognized lists are as follows.

Consolidated Lists of European Union, United Nations, & OFAC

Governed by the Security Council, the United Nations has a consolidated list of sanctioned entities, regimes, and individuals with criminal background subjected to AML compliance measures by the institutions. The conflicted entities are put on the list motivated by their geopolitical interests, human and drugs trafficking, terrorist funding, and several other financial crimes such as bribery, money laundering, tax evasion, and corruption.

Similarly, the Office of Foreign Assets and Control (OFAC) under the Department of Treasury has its list of Specially Designated Nationals (SDN) and Blocked Persons who contribute to the activities which are against the foreign peace policy of the United States. The list with hundreds of individuals and entities being sanctioned or prohibited to do business with unless enhanced diligence measures are in place, keeps on updating to combat the growing compliance threats.

Requiring every compliance officer and business to screen and monitor their customer during onboarding or during the tenure of business relationships, European Union (EU) under the administration of European Commission imposes financial institutions to refer to the consolidated list of individuals and entities thrusted with financial sanctions and subject to asset freezing.

Politically Exposed Persons (PEPs) List

The absence of one unified definition of a politically exposed person (PEP),  the complex nature of PEPs network, and varying regulatory stances to deal with PEPs are the factors that enhance the difficulty of orchestrating a designated PEP list as it keeps on changing in a dynamic political environment. However, advised by the Financial Action Task Force (FATF), institutions are required to implement enhanced due diligence and PEP checks when dealing with such high-risk individuals.

To develop a better understanding of how complex PEP networks can be navigated, dig into the article here.

Depending on the jurisdictional compliance needs, there are several other lists that an MLRO can refer to while meeting customer screening requirements. The lists include, not limited to, the following.

• The wanted persons list (Red Notices) by the International Criminal Police Organization’s (Interpol)
• The most wanted list by the U.S. Federal Bureau of Investigation (FBI)
• Warning list by the Ontario Securities Commission (OSC) in Canada
• The Black and Grey lists of jurisdictions by the Financial Action Task Force (FATF)

Find a comprehensive guide to understand the FATF’s Grey and Black List here.

Having the primary areas of compliance for watchlist screening covered, let’s not wait more to delve into five primary facts about watchlist monitoring that every compliance officer and small to medium enterprises (SMEs) should not overlook for effective compliance in the year 2024.

Quality of AML Database Defines the Effectiveness of AML Compliance

With numerous resources available to perform watchlist and sanctions screening, the quality of resources or precisely credibility of the watchlists plays a defining role in the AML compliance program. The lists issued by global governing bodies are considered the reliable resources for global watchlist screening. Other than ensuring the reliability of watchlists, MLROs are needed to make certain the following facets of the database they are relying on.

• The governing bodies keep on adding and removing enlisted entities from the lists which needs to be looked after before employing the specific list into screening protocols.
• The public provision of the lists expose them to possible modifications which makes it mandatory to analyze the accuracy of data in the lists.
• The dynamic nature of watchlists require a delicate analysis of which list should be used to screen on local and global scale.

Sole Reliance on Automated Tools Can Be Misleading

The efficiency of automated tools embedded with artificial intelligence (AI) and machine learning algorithms can not be doubted in establishing compliance and watchlist checks. However, the sole reliance on automated tools comes with concerns as of below.

• Inability of automated tools to comprehend contextual understanding of increased AML risks which needs human intervention and sound judgment.
• The evolution of executing money laundering and other predicate crimes need the tools to pick up the pace and eradicate the false sense of scrutiny.
• Implementation of certain criteria to flag an entity gives birth to increased false positives where a risk based judgment is overlooked while consuming time and cost of compliance.

Finding the Right Compass in Dynamic Regulatory Landscape is the Key

The year 2023 witnessed more than two thousand new sanction designations by the Department of Treasury OFAC while sanctions designations by the United Nations saw a fall from 956 to 859 in the same year. Below visual reveals the most sanctioned countries in 2023 along with the metrics of sanctions imposed on them.

The liquid nature of regulations and lists to screen from require a compliance system which can survive the dynamic nature of the regulatory landscape. An efficient compliance program including integration of watchlists and sanction checks to thrive in the global business community must have the following.

• Establishment of risk assessments by considering the factors such as geographic locations and customer profile, and transaction volume and frequency.
• Appropriate policies and compliance procedures must be in place addressing the assessed risks.
• Financial institutions are required to block transactions or assets of enlisted entities when found passing the US financial system.
• A structured reporting trail of the blocked or prohibited transactions or customers must be maintained while auditing of the compliance program needs to be done by the internal departments or third party consultants.

Harnessing the Technical Advancements is Inevitable

With increasing AML enforcement actions, the adaptation of compliance tools and services has enabled the institutions to find their way around the financial crimes and changing regulations. It has become unavoidable for the MLROs to have the basics to advance knowledge of technology integration into watchlist screening services to meet the compliance requirements. The employment of the latest technology into the compliance program enables the crime fighters to achieve the following.

• Ensurance of robust screening and monitoring with required adaptability to changing regulations and updating watchlists.
• Reduced false positives and effective risk management of high-risk profiles through integration of technology with effective time and resource allocation.
• Provision of smooth documentation and reporting through automated audit trails with swift case management and regulatory audits.

AML Risk Assessment Can Be Shadowed by Geopolitical Dynamics

Globalization undoubtedly has brought immeasurable perks to the global trade and economic growth with increased exposure to new and expanded markets and improved living standards. When it comes to AML compliance to protect global peace and financial integrity, the geopolitical regulatory and economic motivations tell another tale of fragile scrutiny. It is imperative for an MLRO to understand the geographic needs of regulations and compliance requirements while designing and implementing a compliance program. The effective application of watchlist checks requires the MLROs to make a sound judgment on dynamic regulatory needs varying with jurisdiction to jurisdictions.

Where varying regulatory needs bring ambiguity for compliance officers, the automated watchlist solutions allow them to play a proactive and safe game of compliance. For instance, the regulatory demand of PEP screening in the United States requires institutions to implement customer due diligence for domestic PEPs while EDD must be performed for international PEPs. Considering the potential threat of compliance, watchlist screening with advanced technology and optimized algorithms makes it possible to measure the acute risk for everyone who holds a prominent function in public office.

A Sneak Peek into Future of Watchlist Compliance

Predicting a future of watchlist screening is not as difficult as predicting the next regulatory change because of technological advancements and automation of machine learning in detecting the fraudsters. Technology will evidently play its role through research and innovation, a point to ponder is how much institutions are willing to cooperate with each other and enforcement authorities to seize the spread of financial crimes while the orchestration of an effective compliance program is more of an ethical conduct than fear of losing the compliance game.

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