Effective Sanctions Screening: Best Practices for Preventing Financial Crime

In March 2023, the US Federal Reserve and Treasury fined Wells Fargo bank $97.8 million for violating US sanctions regulations. Two months later, crypto firm Poloniex agreed to pay $7.6 million as a settlement with OFAC for violation of 66K sanctions.

With penalties for sanctions violations well into the millions, sanction screening is essential for any company seeking to ensure compliance. The process aims to detect, prevent, and manage risks related to financial crimes by checking individuals and/or entities against national and international sanctions lists. Sanctions screening is also a key component of AML/CFT compliance regulation.

However, surveys including the 2022 Thomson Reuters Anti-Money Laundering Insights show that sanctions screening is a great challenge for many businesses.

Let’s explore what sanction lists are, the types of sanctions out there, who needs to conduct regular screening, and also how to do it effectively.

What is a sanction list?

Sanction lists are created by governments or international organizations. They can include persons, entities, or groups which violate international law or conduct illegal activity like drug and human trafficking, or are suspected in terrorist activity—including financing, proliferation of weapons of mass destruction, and more.

Businesses need to follow sanctions regimes, and are therefore required to screen customers (individuals and legal entities), beneficiaries, and other related persons in cases specified by law. Here’s when:

• Prior to onboarding new customers
• Upon KYC reviews or changes to a customer’s information
• Before processing any transaction
• Upon any updates to national and/or international sanctions lists

Conducting business with a sanctioned person or organization may result in serious consequences for a business, such as:

• Security breaches
• Regulatory fines
• Legal action, e.g. imprisonment
• Reputational damage

Other actions, depending on the jurisdiction, e.g. in the UAE it may be banning the violator from working in the sector related to the violation for the period determined by the Supervisory Authority, or license revocation.

Types of sanctions

The subject of sanctions can vary depending on various factors. Some sanctions are aimed at entire jurisdictions (UN sanctions against North Korea), while others are more targeted (EU sanctions against Hurras al-Din, a Syria-based al-Qaeda affiliated group). There are also sanctions against specific individuals and entities, such as those on the US Treasury Office of Foreign Assets Control (OFAC) Specially Designated Nationals and Blocked Persons List. 

Sanctions also differ by sector. For example, EU restrictive measures in view of Russia’s invasion of Ukraine impose restrictions on the following sectors: 

• Financial sector (e.g., disconnecting key Russian banks from SWIFT);
• Energy sector (e.g., bans on Russian coal and other solid fossil fuels);
• Airspace, maritime and road transport (e.g., a ban on export, sale, supply or transfer of all aircraft, aircraft parts and equipment, along with goods used in the aviation sector to Russia; closure of EU airspace to all Russian-owned, registered or controlled aircraft, including private jets of oligarchs)
• Arms embargo ( a prohibition on selling, supplying, transferring or exporting arms and related materiel of all types to Russia; export bans on civilian firearms)
• Trade restrictions and bans on goods including iron, steel, coal, cement, bitumen and asphalt, carbon and synthetic rubber, seafood, Russian-origin gold and other luxury goods.

Sanctions can also be categorized based on the authority that imposed them:

1. National / government, sanctions. States can impose  both sectoral sanctions and targeted sanctions (lists maintained by individual countries, which include persons or entities subject to sanctions for illegal activities, e.g. terrorist financing). 

Here are some country examples of targeted sanctions : 

• The U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) list
• United Kingdom HM Treasury Office of Financial Sanctions Implementation Consolidated List
• DFAT Australia Consolidated Sanctions List
• Sanctions Financieres Internationales of Luxembourg 

2. International sanctions. There can also be sanctions imposed by international organizations, such as the United Nations and the European Union. These can target persons, organizations or countries that pose a threat to international peace and security.

Here are some examples of international sanctions:

• The UN Security Council’s sanctions list, which target individuals or entities associated with weapons proliferation, terrorism, or human rights abuses
• Consolidated list of persons, groups and entities subject to EU financial sanctions

More information about the EU sanctions regime can be found on this map. 

Which businesses should conduct sanctions screening?

In general, all businesses in all sectors should pay close attention to sanctions regimes and have adequate controls in place. Historically, finance has been the primary industry under regulatory scrutiny for sanctions compliance, but now other industries are also under the radar.

As a rule, the following types of businesses should conduct regular sanctions screening against targeted sanctions (including as a part of AML/CFT compliance):

1. Financial institutions (FIs)
2. Designated Non-Financial Businesses and Professions (DNFBPs):

• Casinos
• Real estate agents
• Dealers in precious metals
• Dealers in precious stones
• Lawyers, notaries, other independent legal professionals and accountants, and 
• Trust and Company Service Providers.

3. Virtual assets service providers (VASPs).

What should a business do to comply with AML regulations?

To comply with a targeted sanction regime, businesses should usually conduct the following procedures:

1. Screen all customers, related persons, and transactions. Businesses should check individuals, groups, or entities against designated sanction lists where they operate. The currencies traded in should also be checked, along with the  partners of a given client. This can take the form of a manual check (i.e. inputting a name into an online search tool), a database check, or an automated screening process of customer  and stakeholder databases on an ongoing basis.

• Conduct analysis to determine matches, true positives, false positives, and more. This is to compare potentially matching data from various sanction lists against applicant profiles to establish an exact match.

If a potential match is identified during sanctions screening, the institution should conduct further due diligence measures to verify if the match is accurate. If there’s a true positive match, the institution should determine which action needs to be taken. Here are some actions that can be taken:

• limiting services to the client 
• freezing assets
• reporting to regulatory authorities.

Challenges and solutions

Sanctions screening is a challenging process for many businesses. The main problems companies face are:

1. Large amounts of data. Sanctions screening involves processing and analyzing large amounts of information, including customer names, transactions, transaction types, and more. This can make it hard to accurately identify potential matches and can result in false positives, which can be difficult to resolve.
2. Language-related complexity. Sanction lists can be complex and may include various alternate spellings, aliases, alphabets, abbreviations and other factors that make it harder to identify sanctioned individuals and organizations. This can lead to false negatives, which can put businesses at risk of sanctions violations. 
3. Limited resources. Businesses may not have enough resources to conduct regular sanctions screening, especially if they do it manually. 
4. Increased regulatory scrutiny.

Sanctions lists can change frequently, even on a daily basis. And regulators are paying extra attention to how accountable institutions comply with sanctions regimes. They are also increasing their expectations around how quickly institutions can implement sanctions changes into their operations.

Solutions:

1. Find a reliable service provider that has a large database of sanctions and AML lists, which are screened automatically.
2. Conduct ongoing monitoring using a reliable solution to immediately get alerted to potential matches. 
3. Get an automated screening tool with “fuzzy matching” algorithms. This is an effective screening system which relies on both exact and inexact name matching for accurate identification, as bad actors often transpose names and other data trying to conceal their true identity.
4. Conduct employee awareness training. Businesses should conduct ongoing training for employees involved in sanctions screening to ensure they are up-to-date on the latest sanctions lists and best practices for sanctions compliance.

FAQ

• What is a sanction list?

  Sanctions lists are lists of individuals and entities subject to restrictive measures under international and/or domestic sanctions regimes.

• What is sanction list screening?

  Sanction list screening is the process of checking customers and other related persons against sanction lists to ensure that they are not listed under domestic or international sanctions.

• Who should be screened against sanctions lists?

  Financial and Designated Non-Financial Businesses and Professions (DNFBPs) need to screen the following entities and persons against sanction lists:

  • Customers (legal entities and individuals)

  • Systems containing customer databases

  • Parties to any transactions (e.g., sender, recipient, buyer, seller, agent)

  • Beneficiaries and other related persons

  • Directors or agents acting on behalf of customers

  • Partners, vendors, suppliers, and contractors

• Which countries are on sanctions lists?

  The following countries are currently under the UNSC sanctions:

  • Central African Republic

  • Democratic Republic of Congo

  • Eritrea

  • Guinea-Bissau

  • Iran

  • Iraq

  • Lebanon

  • Libya

  • Mali

  • North Korea

  • Somalia

  • South Sudan

  • Sudan

  • Yemen