8 Key Practices to Choose the Best Sanction Screening Solution

The ongoing geopolitical tensions, especially the Russia-Ukraine conflict, have increased the need for sanctions compliance. Recent stats observed a 700% increase in the number of sanctioned securities over the past two years. The main objective of sanction screening is to check individuals and businesses against relevant lists.

These screening processes consider valid points, such as specific countries, trading partnerships, business relationships, and currencies. Such systems benefit businesses by strengthening their compliance frameworks that help them navigate the complexities of sanctions screening.

Sanctions non-compliance poses risks such as regulatory penalties, operational disruptions, and reputational damage. Addressing these sanctions risks ensures economic resilience and financial integrity.

Lack of accurate sanctions screening can either lead to penalties or loss of business due to unnecessary de-risking of high net-worth clients. Therefore, it is necessary that the sanctions screening system be calibrated to filter the risk and not the unsuspecting customers.

AML Watcher, through this detailed guide, provides a comprehensive overview of sanction screening compliance and its best practices. Let’s proceed with this article to understand the significance of sanction screening for entities, organizations, and countries.

What is Sanction Screening?

Sanction screening is critical for compliance with regulations of the jurisdiction in which a financial institute or particular obligated sector operates. Let’s take an example of onboarding a new customer in a U.S.-based bank.

The first thing they must do is to screen their name against the United Nations Security Council terrorist list or the Office of Foreign Assets Control (OFAC) Specially Designated National and Blocked Persons (SDN) list.

Verifying against sanctioned lists ensures the individual or entity is not subject to financial sanctions. If the screening system detects an exact or close match, the bank may pause the onboarding process for further review or decline the application.

These sanction screening requirements can be fulfilled by preventing financial crime and ensuring compliance with evolved regulations. The system identifies “bad actors,” including individuals, entities, and organizations flagged for violating international regulations.

It cross-checks names along with other identifying details, such as date of birth, nationality, and address, against official sanction lists.

These lists may include global watchlists of terrorists, human traffickers, and other criminals.

International Sanction Lists

International sanctions are tools governments use to fight financial terrorism, crime, and other threats related to global security.

These sanctions can restrict trade, freeze assets, and impose travel bans on individuals, entities, and even countries for different reasons.

Below are some of the major international sanctions lists that organizations must monitor to ensure compliance:

• OFAC Sanctions lists
• UN Sanctions Lists
• EU Consolidated Sanctions List
• HM Treasury Sanctions List
• Jurisdiction-specific sanctions list in which an obliged sector operates
• Global Affairs Canada

Some of the sanctions listed by international regulatory bodies are mentioned below:

• Global Affairs Canada

Fintrac is Canada’s financial intelligence unit (FIU) that monitors banks, money services, and real estate firms. It does not maintain any watchlists and sanctions, but it plays a pivotal role in anti-money laundering (AML) and counter-financing terrorism (CFT) regulations.

• Office of Foreign Assets Control (OFAC)

OFAC is responsible for directing or enforcing US trade and economic sanctions. It includes the following lists:

SDN Lists

This list contains individuals and entities that are linked with drug trafficking, terrorist financing, human rights violations, and other possible dangers to US national security.

The SDN List includes individuals and entities involved in:

• Terrorism
• Drug trafficking
• Proliferation of weapons of mass destruction (WMDs)
• Human rights abuses
• Cyber threats
• Corruption and other illicit activities

Non-SDN Lists

These lists are like “be careful lists,” which contain individuals and entities that do not involve the complete freezing of assets.

Non-SDN lists contain the following lists:

• Sectoral Sanctions Identifications (SSI) list
• Foreign Sanctions Evaders (FSE) list
• Palestinian Legislative Council (NS-PLC) list
• The list of foreign Financial institutions Subject to Correspondent Accounts or Payable-Through Account Sanctions (CAPTA List)

• His Majesty’s (HM) Treasury

His Majesty’s Treasury is one of the United Kingdom’s government departments responsible for overseeing the country’s finances and economy.

HM treasury does not have its own sanction lists but works as a regulatory body that imposes an already established sanctions framework. In this department, the financial sanctions are supervised by the Office of Financial Sanctions Implementation (OFSI).

OFSI issues the list of businesses, ships, and individuals subject to sanctions within the UK. These sanctions can be imposed subject to foreign and national security concerns.

What’s the Purpose Behind the Sanction List?

A sanction list restricts individuals, entities, or countries from accessing their financial systems and economic activities. All these actions are done by exerting extra pressure, including hefty penalties.

Sanctions are not legally binding in all cases, but they carry significant damage to the ones who don’t follow them.

To change an entity’s behaviour and prevent it from being involved with undesirable actions such as terrorism, human rights abuses, weapons proliferation, or violations of international standards, sanction screening is a must-have.

It’s a tool that helps authorities ensure compliance with international norms and foreign policy by using economic pressure to achieve strategic objectives.

According to the Financial Action Task Force (FATF), sanction screening is pivotal in enforcing regulatory compliance using targeted financial sanctions imposed by authorities such as the “United Nations Security Council.”

Sanctions are made to freeze the culprits’ assets and ensure they are not getting an advantage from any of their financial sources, directly or indirectly.

Effective screening ensures that designated non-financial businesses and professions DNFBPs, financial institutions, and other entities are not getting involved with sanctioned parties.

Choosing the Best Sanction Screening Solution

Before selecting a sanction screening vendor, it is necessary for every individual, entity, or country to assess risk exposure.

A prerequisite to selecting the right sanctions screening solution is first to get clarity for risk appetite. The shortcomings that most companies face while connecting with a new sanction service provider and the best practices they can adopt to get effective results are:

• Comprehensive Data Enrichment

The best sanction screening solutions can implement advanced data enrichment techniques to improve entity resolution by incorporating additional identifiers, such as secondary addresses, past employment records, and known aliases.

The system relies on sanctions list management that prevents false positives from incomplete data. Instead of flagging an entity merely because of a name match, it evaluates a broader set of attributes to ensure accuracy and efficiency.

• Real-time Update

Sanction lists change frequently; therefore, it is necessary to onboard such screening solutions that frequently update the data. Slow updates could result in entities unknowingly doing business with someone who has just been added to the sanction list.

This would create legal and reputational risks for businesses. Therefore, a screening solution must know how to share the updated results with the businesses.

• Customization as Per Risk Appetite

Businesses define their own risk tolerance. Some of them may opt for comprehensive screening against all available lists, whereas others target specific types of sanctions or jurisdictions.

A worthy screening service enables a proper customization feature where entities can easily match their company’s unique risk appetite. If not, companies might waste resources by over-screening or taking on too much risk by under-screening.

The most necessary thing is that screening service providers must have data, at least against the sanctions list falling within exposure.

One of the best sanctions screening practices to remove false positives is to add a custom risk screening feature that allows for prioritizing sanctions lists falling under risk exposure.

In this way, screening officers can get exact data by steering clear of names from irrelevant lists.

• Contextual-Based Screening

A sanction screening service can be effective only if it provides contextual analysis by considering the following aspects:

• Extra historical information
• Nature of business relationship
• Type of transactions
• Possible geography risks

With the implementation of the above-mentioned best practices, businesses can choose a screening service that will improve compliance, streamline operations, and minimize possible risks.

• Delisting Feature

Sanction lists are both subject to additions and removals of names. An effective screening service must quickly remove the individual or entity’s name from the internal screening list when they are delisted.

Without it, authorities will continue to treat the individuals as sanctioned even after they’ve been cleared from the list; that can be unfair.

• Data Relevancy

Businesses must partner with a screening service that can quickly reduce the false positives and ensure them with real dangers. For this, the screening service must contain updated, relevant, and accurate data. With such effective services, businesses can save themselves from wasting resources on irrelevant matches.

• Comprehensive Risk Categorization

The best sanction screening solution goes beyond a simple sanction/non-sanctioned classification by offering advanced labeling features. It enables precise tagging and categorizing of screened entities based on risk factors such as secondary sanctions, asset freezes, travel bans, and arms embargoes.

Additionally, it ensures compliance accuracy by referencing the specific regulation or executive order under which a sanction applies, particularly in the U.S. regulatory framework.

• Global Coverage

Sanctions lists vary from country to country and business to business. A screening service with limited coverage might miss the essential sanction information, leaving the entity or organization vulnerable.

For instance, if the screening service only provides US sanction lists and the business operates internationally, it will miss the EU and UN sanctions. Therefore, a sanctioned service must provide global coverage.

Thus, Effective sanctions screening best practices are crucial in detecting and preventing sanction evasion tactics, such as the use of shell companies, alternative payment methods, and deceptive trade routes to bypass regulatory controls.

Therefore, financial businesses can adopt these best practices to choose the right screening partner.

Advanced Sanction Screening with AML Watcher

AML Watcher has comprehensive coverage of sanctions lists from 215+ countries, with updates to the list being made accordingly.

AML Watcher offers enhanced labeling of secondary sanctions to resolve the conflict between OFAC sanctions and EU blocking statutes and allow international financial institutions to measure the exact scope of associated risk