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Kaan Demir

KYC/AML Technology Analyst



Published Date

December 22, 2023


Blog / A Comprehensive Sanctions Screening Approach to Securing Transactions

10 min Read

A Comprehensive Sanctions Screening Approach to Securing Transactions

Money laundering has globally harmed the economic system and is a stigma that is hard to eradicate. It is estimated that around 2-5% of the global GDP constitutes illegal financial flows/transactions. This is where the significance of sanction list screening is accentuated as it makes use of a huge dataset in real-time to detect entities/individuals who fall into the sanctioned list and may pose a threat to the organization. FATF emphasizes the use of sanction list screening software as an AML and CTF strategy. The lists keep updating in real-time. This tool enables the mitigation of risks associated with money laundering and protects the companies from threats that may cause reputational and financial harm in the future as well.

Let us now deeply understand what sanction list screening actually is.

Understanding Sanctions

Sanction lists contain the names of individuals, countries, groups, or entities that are maintained by the government of that particular jurisdiction or an international body. There are various types of sanctions which include diplomatic, economic, military, and trade sanctions.

  • Diplomatic Sanctions: These majorly include any travel bans or sanctions that pertain to any diplomatic ties.
  • Economic Sanctions: These include all the sanctions that are related to investments, financial transactions, and trade restrictions.
  • Military Sanctions:  This is fairly a different kind of sanction. It involves the use of force to achieve political aims.

In order to protect organizations and even countries from financial and criminal threats, international bodies are tasked with imposing sanctions with the aid of sanction lists. For instance, the United Nations Security Council (UNSC) aims to impose sanctions for the sake of establishing global peace on countries that might be a potential threat to other countries because of their stances on war and politics. European Union oversees the task of maintaining sanction lists but the aim is merely a part of Common Foreign and Security Policy. Furthermore, OFAC is a sanctions regulatory body of the United States. The purpose of maintaining and updating the sanctions lists is the enforcement of economic sanctions which also include trade sanctions.

It is highly important to comply with the AML regulations which especially signify sanctions checklist screening for the following reasons.

Risks of Non Compliance

Non-compliance to AML regulations has oftentimes led to the countries and organizations facing legal actions which mostly include the payment of hefty fines and penalties. Additionally, non-compliance may also lead to criminal charges if the entity is found to be associated with criminals in any way. This is proven by the fact that the (OFAC) has imposed huge fines on companies for violating and not complying with sanctions. Apart from legal fines, businesses also become prone to long-term reputational damages which can further have far-fetched consequences on the operations of the businesses. This is because it directly impacts the relationships with stakeholders which include the people in the supply chain, customers, and investors. To better illustrate this, it was found that corporations like ZTE and Huawei have violated the sanction-related laws, they had to face a tarnished image of their own in the international market. Needless to say, when companies face such legal and reputational damages, it ultimately affects their financial statements and the flow of revenues. This accentuates the need to have a well-developed sanction list screening software in place to hedge from such major long-term losses.

An analysis of case studies will be better able to illustrate the significance of global sanction lists.

Case Studies

The Case of Commerzbank

Commerzbank, for the ease of its customers, introduced new processes for streamlining payments. For this reason, they also expanded their watchlists (which included sanctions lists). For this purpose, they made use of a centrally managed and locally deployed sanction screening. This led the bank towards lower investigative costs and better detection of suspicious entities.

Sanctions Against North Korea

Another major example includes the sanction of North Korea by OFAC. OFAC monitors and oversees the sanction regulations in the USA. The body has developed a comprehensive sanction list screening against all those countries that propagate war or nuclear proliferation. This restriction isolated North Korea globally financially and diplomatically.

Sanctions screening, with international financial networks or government agencies, achieves political and diplomatic goals.

To make sure that automated sanctions list screening solutions are effective, there needs to be an integration of advanced technology, collaboration from all over the world, and evolving with the changing regulatory requirements. Let us understand this in detail.

Utilization of AI and ML:

Artificial intelligence and machine learning are two advanced technologies that are now even used by international bodies to ensure that the sanction list screening software used by the organizations is error-free i.e. they have reduced false positives. These advanced technologies enable an analysis of the vast dataset, read it, and detect anomalies. This is how AI and ML also help in transaction monitoring and in the identification of suspicious transactions.

Global Collaboration

For sanction list screening a collaborative sharing of information is highly crucial and it becomes easier when global regulatory bodies and financial institutions are all on the same page. Even FATF has proposed laws about AML which are standardized. However, it must be noted that various countries may have AML and CTF laws of their own. However, these laws must still be shared with other countries who might be doing business with them.

Regulatory Changes

How the sanction screening laws are formulated must keep in view any recent updates. The implementation of new laws or changes to existing regulations can greatly impact how financial institutions conduct screening. This is best explained by the examples of the European Union’s regulatory environment which has undergone a lot of changes. There has been the introduction of the General Data Protection Regulation (GDPR), which puts a lot of importance on data privacy. This means that while screening practices are done, data must be protected side by side.

Advanced technologies, global collaboration, and adaptation to regulatory changes are essential for screening practices.

Concluding Thoughts

Money laundering has globally harmed the economic system and is a stigma that is hard to eradicate. It is estimated that around 2-5% of the global GDP constitutes illegal financial flows/transactions. This signifies the need to address the conundrum and this is where sanction list screening plays its role. The tool makes use of highly reliable software that enables it to detect the sanctioned entities in real-time from an expansive database and bar them from being associated or forming business ties with organizations. Any non-compliance to AML regulations ultimately leads to the imposition of hefty fines as observed in fines imposed by the OFAC. Additionally, corporations have found themselves to experience reputational damages which have far-reaching long-term consequences posing financial risks to the company too. North Korea was isolated from global businesses because of the US laws entailing its sanction. To further revamp the process of sanction list screening, there has been a greater use of AI and ML for increased efficiencies and accuracy. Moreover, AML Watcher especially emphasizes the need for global collaboration in the changing regulatory environment in sanction checklist screening by publishing updates on global coverage.

Contact us today to protect yourself from sanctioned entities upfront and fortify the security system of your business.

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