A certain overseas company has quickly become a business’s most profitable customer. Then by accident, that business stumbled upon a shocking discovery: that customer appeared on an international watchlist of financial scammers. It had exploited business relationships all over the world for years as part of a complex money-laundering scheme. Suddenly, that major customer ends up becoming a major problem.
Rigorous sanctions screening could have protected that business from potential disaster. Risk and fraud professionals working for financial institutions should already be aware of screening’s necessity. But these and other types of businesses, particularly those with an international presence, should also know how sanctions screening can be conducted most effectively—and how technology can help keep them from becoming unknowingly entangled in financial crime.
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What is sanctions screening?
Sanctions screening is the process of checking individuals, businesses, and transactions against official lists to identify potential risks associated with sanctioned parties. Screening can shield organizations from the financial and reputational risks associated with doing business with suspect entities or individuals. It also helps ensure regulatory compliance with federal know-your-customer (KYC) and anti-money-laundering (AML) rules. In addition, it’s legally required for many organizations. Failure to comply can result in massive fines, loss of banking licenses, and even criminal prosecution.
Companies typically conduct sanctions screening when onboarding customers and establishing business relationships with vendors, partners, or intermediaries. Financial services businesses engage (or should engage) in sanctions screening during customer onboarding, and many organizations do so before processing transactions. Businesses also may incorporate screening into their ongoing monitoring of higher-risk customers, such as those that employ politically exposed persons (PEPs).
The sanctions screening process begins by collecting relevant identifying information from customers or transactions, then using digital tools to compare this information against sanctions lists. If investigating a potential match (or “hit”) reveals that the party has been sanctioned, the organization can then terminate any possible business relationship.
What is a sanctions list?
Sanctions lists are official registers of individuals, entities, vessels, and countries that are subject to economic or legal restrictions. Governments and international organizations establish and maintain these type of lists to enforce compliance with sanctions “regimes,” which include:
- Comprehensive sanctions: Complete bans on trade and financial transactions with entire countries. North Korea is an example of a nation that appears on comprehensive sanctions lists.
- Selective sanctions: Restrictions on specific activities, sectors, or resources. Many countries enforce restrictions or outright bans on, say, exporting technology to certain countries or importing oil from particular nations.
- Sectoral sanctions: Restrictions on dealings with certain sectors of a country’s economy, such as energy, defense, or banking.
- Secondary sanctions: Penalties against third parties that do business with sanctioned entities.
- Financial sanctions: Freezing assets, blocking transactions, or restricting access to financial markets.
A notable example of a sanctions list is the federal Office of Foreign Assets Control’s Specially Designated Nationals and Blocked Persons (OFAC SDN) List. Prominent global examples include the High-Risk and Non-Cooperative Jurisdictions List maintained by the Financial Action Task Force (FATF), a worldwide watchdog battling money laundering and terrorism financing, and the United Nations Consolidated List, which comprises all individuals and entities subject to Security Council-imposed sanctions. Another is the European Union’s Consolidated Financial Sanctions List.
Screening challenges
Red flags to watch for
Though sanctions lists seem straightforward, the screening process isn’t a simple one. Close name matches with slight variations in spelling can create confusion. A company’s ownership structure may complicate accurate screening. Newly formed companies in high-risk financial sectors also can be difficult to verify. And a potential customer or partner may obscure its activities through shell companies or third-party intermediaries.
- Close name matches with slight variations in spelling
- Transactions involving high-risk jurisdictions or known tax havens
- Complex ownership structures obscuring beneficial owners
- Transactions with unusual patterns or no clear economic purpose
- Newly formed companies in high-risk sectors with limited history
Top sanction screening challenges
Then there’s transaction history. If a party has engaged in transactions involving high-risk jurisdictions or known tax havens, or if its transaction history reveals unusual patterns or seems to have no clear economic purpose, these must be considered flags of the deepest scarlet.
In addition, screening staff must unsnarl name variations and transliteration issues across different languages. There’s also the problem of false positives, which can be so numerous that they overwhelm sanctions compliance resources. Sanctions lists often have complicated formats, which can hinder automated data-gathering. There then is the very basic challenge of keeping abreast of changes in list “membership” and regulations.
- Name variations and transliteration issues across different languages
- False positives overwhelming compliance resources
- Keeping up with rapidly changing sanctions regulations
- Screening against multiple lists with different formats
- Identifying ultimate beneficial owners in complex corporate structures
Best screening practices
Sanctions compliance teams and their managers can mitigate these challenges and risks by incorporating current best practices into their processes. Here are the top 5 best screening practices:
- Implement a risk-based approach
- Maintain updated screening technology
- Establish clear escalation procedures
- Conduct regular testing and validation
- Train staff continuously
One such practice is implementing a risk-based approach. This involves allocating screening resources based on risk profiles. In other words, organizations devote more due diligence to assessing higher-risk relationships. Another best practice is using specially developed screening technology whose advanced algorithms can clarify subtle variations in company or individuals’ names. Such a solution should also be able to conduct real-time transaction screening and sanctions list updating.
In addition, organizations can establish clear procedures for taking escalating actions. These may include protocols for investigating potential matches and creating decision trees for resolving alerts. All decisions to escalate are thoroughly documented and rigorously justified. Screening processes also require regular testing and validation. Company risk and fraud professionals should run simulations to ascertain that their systems are effectively detecting sanctioned entities.
Sanctions screening isn’t a set-it-and-forget-it process. Risk and fraud staff should be continuously trained in the latest techniques and information to ensure that they clearly understand changing sanctions lists and regulations. Providing regular updates on emerging trends and conducting scenario-based training for handling complex cases can keep staff sharp—and sanctions screening processes effective.
These best practices are all incorporated in Thomson Reuters CLEAR Adverse Media. This digital solution is powered by CLEAR, an investigative platform to analyze vast datasets, including public records, social media, and proprietary databases, in order to identify negative customer mentions. CLEAR Adverse Media’s capabilities include:
- Comprehensive efficiency. Delivering relevant information across numerous databases in one search.
- Timely monitoring. Maintaining real-time connections to negative news sources.
- Compliance documentation. Identifying sources to meet documentation requirements.
- Automated vigilance. Automatically generating comprehensive adverse media and sanctions reports while providing new adverse media and sanctions alerts regarding high-risk customers.
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