In today's global economy, businesses and governments alike face the challenge of preventing financial crimes such as money laundering and terrorism financing. One of the most critical tools for achieving this goal is sanctions screening.
By screening transactions and individuals against sanction lists, organizations can identify and prevent illicit activities.
In this blog post, we will explore the importance of sanctions screening, how it works, and why it is crucial for businesses to implement effective sanctions screening measures to protect themselves and society as a whole. So, let's dive into the world of sanctions screening and discover its role in maintaining a safe and secure global economy.
What is Sanctions Screening?
Sanctions screening is a tool used to detect and prevent financial crime to ensure compliance with AML/ KYC regulations.
The sanctions screening process helps organizations, countries, and individuals do a sanction check on their records against the sanction list which in turn helps them avoid doing business with a party on the politically exposed persons (PEPS) or sanction lists.
This way, an individual or organization can stay on top of its compliance game. When an organization fails to comply with screening for sanctions, they stand the chance of getting fined which usually involves a huge amount of money and even criminal proceedings in the worst cases.
Sanctions screening is also one of the risk-based approaches organizations used. It is also an important aspect of an organization’s Know-Your-Customer (KYC), Anti-Money Laundering (AML), Know-Your- Transaction and Counter-Finance Terrorism (CFT) processes.
What is a Sanction List?
Sanction lists are compiled with the aim of exposing individuals, companies, and countries that are committing illegal activities such as money laundering or are suspected to do so.
A sanction list is data compiled by legalized government or international bodies, containing sanctioned parties' information. Sanctioned parties can be individuals, companies, groups, legal entities, states, or countries.
The sanction list is intended to reduce financial crime and protect well-meaning or innocent organisations, companies and individuals from financial risk. Hence, it does this by exposing banned or sanctioned parties.
Sanctioned lists are kept by government or international bodies.
How does Sanctions Screening Work?
Sanctions screening involves comparing an organization's data such as customer or business data with sanctions lists to identify any overlap with sanctioned parties. Similarities are flagged and marked for further analysis.
The screening process can be performed manually using online search tools or automatically using software that can screen data on a regular basis or every time manual payments are made.
When is Sanctions Screening Performed?
Because the compliance space is an ever-changing space, individuals businesses and organizations need to ensure they keep up using the best sanctions screening services.
To manage sanctions screening compliance easily, parties are expected to carry out sanctions screening on their customers, most preferably during their onboarding process, immediately after the initial risk assessment is completed. Afterwards, regular screening should be done for both existing and new customers and businesses regularly.
As rightly said, the best time is now. Compliance isn't achieved in a day.
During sanctions screening, all customers' profiles should be matched and their identities verified using the top identity verification methods for businesses that exist today.
For financial institutions, transaction screening can be carried out using transaction monitoring tools, and escalation should be made to the appropriate bodies when necessary.
Senior management of all organizations must take responsibility for ensuring their compliance with sanctions regulations, as regulatory authorities are now subjecting control and procedures to more intense scrutiny than ever before.
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What Type of Data is Screened Against in Sanctions Screening- Sanctions Screening Checklist
There are two types of data screened for sanctions screening:
1. Transactional Data:
Transactional screening, or payment screening, is used to screen the movement of funds, goods, or assets between two entities or bank accounts. The following data are requested during the sanctions screening process
- Names of banks, routing codes and BICs
- Beneficiaries or remitters
- Exact geographical data of all stages in the process
- International Maritime Organizations' numbers
- and exporters to facilitators and shipping companies
- Financial institutions, agents, or intermediaries
- International Securities Identification Numbers
- Trade finance documentation, everything from data about importers
- Text fields and payment references, e.g. SWIFT messages
2. Reference Screening:
This type of sanction screening is also known as customer or name screening. It involves screening non-transactional data such as information on business partners, employees and vendors against sanctions lists.
This process typically includes analyzing strings of data such as names, dates of birth, addresses, cities, and countries.
For effective sanctions screening, organizations and businesses should request the following information from prospective customers:
- Full Name
- Other Names
- Date of Birth
- Registration Number (For Company)
- Identity Number (For Individuals)
- Origin of goods
- Shipping Information
- Ultimate Beneficial Ownership (UBO)
Best Practices for an Effective Sanctions Screening Process
To ensure efficient and accurate sanctions screening and minimize risks, consider implementing the following best practices:
1. Conduct regular sanctions screening to stay up-to-date with changes, including newly added sanctioned parties.
2. Comply with sanctions screening regulations enforced in your jurisdictions.
3. Perform both reference data and transactional screening to ensure the safety of business partners and counterparties.
4. Ensure that data formats match sanctions screening lists to minimize false positives.
5. Use reliable tools to screen data against known lists.
6. Analyze flagged screening results and take appropriate action.
7. Consolidate data and screening processes wherever possible to save time and resources.
8. Leverage automation tools that can screen data regularly or whenever payments are made to avoid manual data inputs and time-consuming analyses
Who are the Relevant Sanctioning Bodies?
There are different bodies responsible for sanctions screening compliance in different countries and organizations. These are the common and relevant sanctions screening lists.
1. Office of Foreign Assets Control (OFAC) Sanction List: This sanction list is implemented on all US citizens, businesses and organizations in the US jurisdiction.
2. HM Treasury Sanction List: This sanctions list is applicable to those who work or run businesses in the UK. The Office for Financial Sanctions Implementation (OFIS) oversees the affairs of this body
3. United Nations (UN) Security Council Consolidated List: This sanction list applies to all UN member states. All financial institutions and banks of the member states are expected to comply with the UN sanction list for anti-money laundering and counter-terrorism financing.
4. The Targeted Financial Sanctions List: This sanction list is applied to all businesses in South Africa. It is implemented by the Financial Intelligence Act (FIC Act).
5. European Union External Action Services (EU EEAS): The sanction list is applicable to all European citizens and corporate bodies in its member states.
6. Private Sanction List: Most companies maintain their own personal registries, such as whitelists and blacklists, to review transactions against. Whitelists generally consist of recognized vendors or other commercial connections that the firm is familiar with and has already completed the necessary KYC steps.
What are the Challenges of Sanctions Screening?
Some of the challenges businesses and organizations face with sanctions screening are:
1. The Constantly Evolving Nature of Sanction Lists:
Sanctions lists are subject to regular updates as a result of ongoing global developments, which involve the addition or removal of new entities and other data. It is crucial for organizations to remain current with the most recent changes.
2. Having to Deal with Inaccurate Data:
When data or screening outcomes contain numerous false positives, it can result in a considerable amount of additional effort. This can be prevented by ensuring that the uploaded data aligns with the sanctions screening lists.
3. Complicated Technology and Procedures:
Sophisticated technology frameworks and procedures are necessary for conducting sanctions screening. In most big corporations, information comes from various systems and procedures, in diverse formats, necessitating consolidation to guarantee conformity with sanctions list screening requirements.
4. Sanction List Management:
The sanction list management can become complex when multiple sanctions lists need to be included in the screening process. This can lead to a slowdown when the process is decentralized. Various entities have their own lists, which may not always be aligned and require distinct approaches, data formats, or systems.
5. Geopolitical Tensions:
Ongoing geopolitical tensions result in the addition of new sanctions that organizations must adhere to based on the jurisdictions of their locations. Multinational companies may find it challenging to manage geopolitical sanctions as they operate in several countries, each with its unique set of regulations.
Keep up with the Sanctions Screening Process with Ease
If you operate your business on a large scale, you may find it difficult to keep track of all your business associates and the transactions being carried out for sanctions compliance assessment. While this is true, there is no excuse for non-compliance as it will be counted as laxity by the responsible bodies. And of course, you will not be spared.
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