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Understanding Sanction Screening: A Simple Guide

Understand sanctions list screening by recalling being a child and getting placed in the “time-out” chair for misbehaving. It was the grown-ups’ way of saying, “Think about what you’ve done!” Now, imagine countries and big corporations as those mischievous kids, and the global community as the stern adults. In the vast playground of international relations, when countries or entities step out of line, they might find themselves in the metaphorical “time-out” chair. This chair, in the world of Anti-Money Laundering (AML) and international politics, is known as “sanctions.”

According to FATF, sanctions screening enforces compliance with targeted financial sanctions imposed by authorities, including the United Nations Security Council. These sanctions mandate countries to freeze assets of designated individuals or entities, ensuring no funds or assets benefit them directly or indirectly. The aim is to prevent money laundering and terrorist financing. Effective screening ensures financial institutions, designated non-financial businesses and professions (DNFBPs), and other entities avoid transactions or relationships with sanctioned parties. Non-compliance can result in various sanctions, be they criminal, civil, or administrative, against both entities and their senior management.

The Nine Types of Sanctions: Navigating the Financial Safeguard Spectrum

Sanctions are the set of regulations imposed by higher institutions to control and coerce the repetition of illicit financial behaviors to maintain peace and security.

Coverage of sanction types includes the following:

  • Economic Sanctions – restrict trade across sanctioned countries. These sanctions can expand up to dismissing global relationships or may also target specific sectors.
  • Financial Sanctions – aimed at barring financial transactions and restricting organizations from proceeding with foreign transactions
  • Travel Sanctions – restrict the entrance of a sanctioned individual into a territory or state in order to avoid associated risks
  • Diplomatic Sanctions – are driven to terminate diplomatic ties between two parties. This may include withdrawing ambassadors etc.
  • Sport Sanctions – limit the participation of sanctioned parties in international sports events or championships.
  • Targeted sanctions – as the name suggests target only specific entities, individuals, or organizations within a defined boundary
  • Sectoral sanctions – reflecting through the name impose limitations on particular sectors of a company for example fiancé, military, etc.

Other categories also include the following:

Also Read: The Challenges Ahead for Sanctions Screening Companies

What makes Sanction Screening a major requirement?

Sanctions screening has become a crucial aspect of the financial world due to different assumptions associated with sanctions. The main focal point of sanctions is to mitigate negative behaviors, rather than altering overall behavior.

Having that said, each region including the US/UK has its own take on sanctions further complicating the gist purpose of these regulations.

This can be jot down through a simple case study following the Ukraine-Russia war. The entire landscape of geopolitics have changed ever since so have the regulation and sanctions existing in the region. All of this necessitates a stronger demand for enhanced due diligence, and continuous updates of the database to stay current with present circumstances and avoid being part of laundering corrupt activities.

Important Components of Sanctions Screening

Sanction List:

The global coverage of core elements within sanction lists includes:

  • A codified register maintained by high regulatory bodies
  • Lists of individuals entities and organizations that have been identified as a threat to security, financial stability, and violation of global norms.
  • Serves as primary referral to ensure compliance in the niche of AML (Anti-Money Laundering) and CFT (Countering Financing of Terrorism).

Governments and financial authorities worldwide meticulously maintain public sanctions lists, each serving as a distinct facet of the complex regulatory landscape. As MLROs are acutely aware, these lists are integral to the fabric of financial compliance and risk management. Here is an exhaustive array of some prominent sanctions lists:

  • United Nations Consolidated Sanctions: Global sanctions list maintained by the UN for peace and security.
  • European Union Consolidated Sanctions: EU’s collective list of sanctioned entities and individuals.
  • U.S. Department of the Treasury, Office of Foreign Assets Control (OFAC): U.S. body overseeing national sanctions programs.
  • OFAC – Specially Designated Nationals (SDN) List: A list of individuals and entities banned from U.S. dealings.
  • OFAC – Foreign Sanctions Evaders (FSE) List: List of subjects that have ignored and not abided by U.S. sanctions.
  • OFAC – Sectoral Sanctions Identifications (SSI) List: List targeting only chosen sectors within sanctioned countries. For example, finance, energy, etc.
  • UK Office of Financial Sanctions Implementation (OFSI): It’s the UK’s authoritative department for implementing and enforcing financial sanctions.
  • Canadian Special Economic Measures Act (SEMA): It is a renowned framework for imposing economic sanctions all across Canada.
  • Australian Department of Foreign Affairs and Trade (DFAT): Australia’s body designated to oversee and check for foreign affairs, including sanctions.
  • Swiss State Secretariat for Economic Affairs (SECO): Switzerland’s authority for regulating economic sanction-related matters.
  • Hong Kong Monetary Authority (HKMA): Hong Kong’s central banking institution to look for finance-related sanctions.
  • Singapore’s Monetary Authority of Singapore (MAS):  It’s Singapore’s central bank and financial regulatory authority to sustain smooth procedures.
  • Japan Ministry of Finance (MOF): Japan’s authorized institution responsible for developing and overseeing financial policies and regulations.

Beyond the aforementioned lists, numerous other country-specific sanctions lists have been integrated with AML Watcher.

The Importance of Sanction List Checks

As regulated by FATF, the sanctions list is the important element in Anti-Money Laundering Screening, which helps in:

Comply better with International Resolutions – most importantly the regulation set by the Council of United Nations Security Council which aims to prevent, suppress, and disrupt activities such as the proliferation of weapons of mass destruction and its financing.

Targeted Financial Sanctions – to freeze the assets of sanctioned persons or entities to ensure that no funds or assets are made available, either directly or indirectly, to these high-risk entities

Prevention of Illicit Activities – by adhering to sanctions lists, countries can coerce money laundering, terrorist financing, and other illicit activities in order to sustain global peace and security.

Mechanism for Designation and Delisting –individuals or entities to ensure that the process is transparent, fair, and based on concrete evidence and avoid false positives.

Communication and Enforcement – among financial institutions, designated non-financial businesses, professions (DNFBPs), and other relevant entities to provide clear guidance on whom to avoid transactions with in order to facilitate the smooth prohibition of risky activities.

Deterrence and Accountability – for entities that might consider engaging in prohibited activities. It holds them accountable and emphasizes the consequences of non-compliance.

Highlighting the Process of Sanctions Screening

Understanding Mechanism of Sanctions Screening

Sanctions screening stands as the foundation pillar to uplift AML/CFT controls. The process of screening begins with cross-checking an entity’s or client’s current standing with directories from authorized regulatory bodies to ensure global peace and security. The entire screening process can be decoded into six distinct stages covering:

  •  Begin by Gathering Insights – to compare client data like identities, residential details, birthdates, and nationalities for potential association with high-risk collaborations and financial transactions.
  •  Undergo Detailed Verification – using sanctions screening lists from trusted sources and external data vendors to ensure data authenticity for accurate sanctions screening process.
  • Enable Cross-Referencing – to verify data with global sanctions screening databases that contain complete information about sanctioned individuals, entities, or nations.
  • Conduct an In-depth Investigation – for a potential match by matching for false positives & re-checking the results using a precise sanctions screening solution.
  •  Maintain Audit Trails – and submit a Suspicious Activity Report (SAR) to the relevant regulatory body in order to maintain complete transparency with confidence.

Sustain Ongoing Monitoring- for updates in sanction lists and regulations in order to make sure your compliance aligns with the changing status of individuals and entities.

Sanctions Screening Process: Data Gathering, Verification, Cross-Referencing, Investigation, Documentation, Ongoing Monitoring

Best Practices

As per Wolfsberg guidance on sanctions screening, the best practices in the sanction screening process are the following:

Sanctions Screening Programme: The fundamental pillars of an FCC (Financial Crime Compliance) program should be applied to sanctions screening. This includes:

  • Screening Technology: It is quite important as preliminary tasks to choose what needs to be screened. The context, frequency, and duration should also be defined to resolve high-risk alerts
  • Responsible Person: Ensure that there are individuals with appropriate skills and experience in understanding sanctions requirements and the technical capabilities of screening software.
  • Risk Assessment: Apply risk-based decisions to resolve specific questions related to what data attributes to screen, when to screen, which lists to use, and how exact or “fuzzy” the screening filter should be.
  • Internal Controls: Comprehend methodologies and technologies available for screening, analyze how system is configured to evaluate that they can detect and manage sanctions risks.
  • Validity: Check the validity of the screening system if it is performing as expected and assess its compatibility in managing risks.
  • Alert Notifications: The system must be able to gather all relevant information for informed decision-making, confirming the validity of the tool being used.
  • Audit Trail & Reporting: Keep pace with metrics reporting that enables an insight into operational risks and any issues with internal controls
  • Technology Decisions: Decide whether building the screening application internally or sourcing it from a vendor aligns with unique industry requirements. 

Effective Screening: Tech Criteria, Skilled Personnel, Risk Assessment, Quality Alerts, Metrics, Testing, Source Decision

Frequency, Accuracy, and Compliance in Sanctions Screening

When is the right time to perform Sanctions Screening to Ensure Compliance

As per FATF, sanctions screening should be performed at intervals that align with the FI’s risk profile and operational needs.

According to the guidelines provided by Wolfsberg, the following must be noted:

  • Transaction Screening, including Payments and Trade: FIs should focus on transactional records necessary for the movement of value between parties. Screening should occur at a point in the transaction where detecting a sanctions risk is actionable to prevent a violation.

Factors that might elevate sanctions risks include:

  • Cross-border transactions: Screening cross-border payments before completing the transaction, known as real-time screening, is common practice.
  • Currency for transaction:  Some currencies have higher risks associated with them as compared to others.
  • Route of the transaction: The path of a transaction also has a chance to influence its risk level.

A Focus on Specific Industries

Finance Industry: It is important to screen sanctioned individuals with modern systems to improve the efficiency of AML/ CFT controls. Also emphasized by the 2021 Sanctions Guidelines of the Philippines, cross-referencing with authorized lists is also crucial to prevent dealing with corrupt parties.

Maritime Industry: Considering its contribution to global trade, the industry is looking to evade challenges related to deceptive shipping. This industry uses sanctions screening as mandated by bodies such as the UN and OFAC with a mission to enable sustainable trade practice.

Aviation Industry: The need for sanction screening for aviation may seem unrelated but highly undeniable. Screening is crucial to detect sanctioned aircraft in order to prevent any dealings within restricted airspace or engage in banned aviation-related activities.

Sanctions screening: Mitigating risks in finance, maritime, and aviation by detecting blacklisted entities and vessels.

Risks and Consequences

Consequences of a Sanctions Breach

A simple non-compliance with FATF’s Sanction Screening Framework results in consequences, such as:

  • Erosion of Counter-Terrorist Financing (CTF) Mechanisms – the FATF emphasizes the importance of a robust freezing regime to disrupt the financial channels of terrorist entities. Without adherence, countries risk enabling the flow of illicit funds that finance terrorism.
  • Compromised International Cooperation – non-compliance can strain diplomatic relations and hinder joint efforts in intelligence-sharing and coordinated actions against designated entities.
  • Exposure to Deceptive Financial Practices – can lead to a country becoming a hotspot for illicit financial flows, including those linked to “ship-to-ship” transfers and other covert methods.
  • Economic Repercussions – place risk of being classified on FATF’s “gray” or “black” lists, resulting in increased scrutiny of financial transactions, reduced foreign direct investment, and potential economic sanctions from other nations.
  • Legal and Regulatory Challenges – cause challenges, as well as international legal actions, including potential lawsuits and penalties.
  • Operational Inefficiencies – may include increased due diligence requirements, potential backlogs in transaction clearances, and a higher risk of financial fraud.
  • Enhanced Due Diligence (EDD) – may be imposed by their international counterparts. This can slow down financial transactions and increase operational costs.
  • Potential Breach of UNSCRs: The FATF guidelines align with the United Nations Security Council Resolutions (UNSCRs) related to terrorist financing. Non-compliance can result in a breach of these resolutions, leading to international sanctions.

Non-compliance risks: Weakening CTF, global cooperation, financial vulnerabilities, legal consequences, operational inefficiencies

Supplementary Aspects of Sanctions Screening

Suspicious Activity Reports (SARs)

Suspicious Activity Reports (SARs)

Suspicious Activity Reports (SARs), often referred to as Suspicious Transaction Reports (STRs). If a financial institution suspects or has significant reason to develop suspicion, it is mandated to report about it. This report is known as a Suspicious Transaction Report (STR) or Suspicious Activity Report (SAR).

The reference to “criminal activity” in the context of STRs encompasses all criminal acts that could be a predicate offense for money laundering. This includes, at a minimum, those offenses that would be predicate offenses as required by other recommendations in the FATF recommendations. The reference to “terrorist financing” in STRs pertains to the financing of terrorist acts, terrorist organizations, or individual terrorists, even if there isn’t a direct link to a specific terrorist act or acts.

All suspicious transactions, inclusive of attempted transactions, should be reported, irrespective of the transaction’s monetary value.

Financial institutions, along with their directors, officers, and employees, are protected by law from both criminal and civil liabilities for any breach of information disclosure restrictions. This protection is valid only if they report the suspicion to a financial institution, irrespective of whether the activity transpired.

Authenticated authorities, supervisors, and self-regulatory bodies are advised to establish due guidelines and provide feedback. This assistance is meant to help organizations implement measures on a national level to prevent money laundering.

Challenges and Solutions in Sanctions Screening

Challenges

False Positives: Names on sanction lists can often match or resemble others, making differentiation between genuine and false matches challenging.

Human Errors: Misspellings and other data entry mistakes can result in incorrect flagging or overlooking sanctioned entities.

Unstructured Data: Outdated data collection methods can lead to disorganized data, complicating the screening process.

External Data Inconsistencies: Mismatches in format, datasets, and coverage from external sources can create gaps in screening.

False Negatives: False negatives in sanctions screening are instances where the system overlooks potential matches with sanctioned parties, posing legal and reputational risks due to incomplete data or inadequate technology.

Data Challenges: Identity Errors, Human Mistakes, Unstructured Data, External Inconsistencies, False Negatives

Choosing the Right Partner for Sanctions Screening

In the realm of Anti-Money Laundering (AML) and sanctions screening, selecting the right partner is paramount for institutions and businesses dealing with high transaction volumes and global clients. AML Watcher emerges as the ideal solution and partner for several compelling reasons:

  • Firstly, global regulatory bodies demand rigorous AML and sanctions compliance. AML Watcher ensures businesses avoid substantial fines and legal consequences through meticulous adherence to these requirements.
  • Secondly, the ever-present risks of money laundering and financial fraud require effective identification and flagging of suspicious activities. AML Watcher excels in this regard, assisting businesses in mitigating financial and reputational risks.
  • Crucially, AML Watcher has revolutionized the industry by reducing the false positive rate to zero through innovative photo verification, streamlining operations and eliminating resource-intensive investigations.
  • Moreover, AML Watcher maintains proactive updates in line with evolving regulations, ensuring continuous compliance for businesses.
  • Advanced technologies like Artificial Intelligence and Machine Learning are harnessed to enhance screening accuracy, while robust data protection measures safeguard customer information.
  • Furthermore, partnering with AML Watcher enhances a business’s reputation, fostering confidence among shareholders, customers, and partners.

In conclusion, AML Watcher aligns seamlessly with FATF recommendations and the Wolfsberg guidance, making it the ultimate solution for institutions seeking robust compliance with sanctions and bolstered security in the global financial landscape.

Contact us to embark on a journey of enhanced compliance, security, and a false-positive-free screening experience.

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