Sanctions Screening: Types, Compliance & Tech Insights

In this article, we will explore the fundamentals of sanctions screening and examine its various forms, such as economic sanctions screening. Additionally, we will discuss four essential best practices for effective screening and consider the role of technology, particularly the capabilities of the FOCAL platform in enhancing the sanctions screening process.

What are Sanctions?

Sanctions are rules set by governments to limit the actions of countries, companies, and individuals involved in financial crimes. The main goal is to stop these risky groups/entities from doing illegal activities by stopping them from opening accounts with banks and other financial services around the world.

There are different kinds of sanctions. These include financial sanctions, diplomatic sanctions, and military sanctions. For example, after Russia invaded Ukraine, some people in Russia faced financial sanctions, like having their assets frozen by NATO countries.

You might be curious about who manages sanctions worldwide. Here are four main groups that do this. They work together to keep an eye on, enforce, and update sanctions to help maintain peace, safety, and rules around the world.

1. First, there’s the Office of Foreign Assets Control (OFAC) in the U.S. OFAC is part of the U.S. Department of the Treasury. They create and enforce economic and trade sanctions against specific countries, individuals, and groups.

2. Second, there’s Her Majesty’s Treasury (HM Treasury) in the UK. HM Treasury also manages financial sanctions and works with others to deal with security and human rights issues.

3. Third, the United Nations Security Council (UNSC) is an international group that can impose sanctions on countries and entities that threaten world peace and safety. The UNSC makes resolutions that describe the sanctions, and member countries must follow them.

4. Finally, there’s the International Criminal Police Organization, known as Interpol. Interpol helps countries work together to fight international crimes, including violations of sanctions. They also help countries enforce sanctions and tackle crimes that cross borders.

In any financial organization, there must be checks on new clients during the onboarding process. This includes due diligence, like customer due diligence (CDD) and enhanced due diligence (EDD).

What is a Sanctions List?

A sanctions list is a list of countries, companies, and individuals seen as high-risk for financial crimes. These lists come from global entities like the European Union, United Kingdom, United Nations, and United States.

Sanctions lists show detailed information about the sanctions that have been applied. Businesses need to check these lists to avoid dealing with banned individuals, entities, or groups. If they don’t, they might face fines and penalties.

It’s important to know that these lists are public and updated regularly. Being on these lists can lead to serious consequences, like losing access to the financial system or facing trade restrictions.

Common Types of Sanctions

Sanctions aim to encourage changes in the behavior of a country, group, or individual. Different types of sanctions serve this main goal but are used for different reasons.

Choosing a type of sanction depends on the desired outcome. Each type puts pressure on the targeted group in unique ways, and sometimes several types may be used together. Let’s go through the different types of sanctions:

1. Economic Sanctions: These are financial and trade penalties aimed at countries, companies, or individuals. Economic sanctions can create trade barriers, import/export limits, embargoes, and financial restrictions. The goal is to make it costly for the target, pushing them to change their policies or behavior.

2. Diplomatic Sanctions: These sanctions can include cutting formal ties or closing an embassy. They may also involve limiting government visits or changing international relationships. The aim here is to put pressure through diplomatic means.

3. Military Sanctions: This type focuses on reducing military power. It can include targeted strikes or cutting off supplies of weapons and other military items.

4. Sporting Sanctions: These sanctions affect the sports capabilities of the targeted group. For example, countries may be banned from competing in international sports events, like the Western boycott of the 1980 Olympics in Moscow due to the Soviet invasion of Afghanistan.

5. Environmental Sanctions: These sanctions target issues like deforestation, endangered species, ozone depletion, and carbon emissions, focusing on environmental safety.

What is Sanctions Screening?

Sanctions screening checks individuals and entities against lists of sanctioned parties created by governments and international organizations, like OFAC, OFSI, the EU's Consolidated List, and the UN's Security Council Consolidated List.

Sanctions screening is mainly connected to financial institutions and is a part of Anti-Money Laundering (AML) controls. This tool helps spot and prevent financial crimes, stopping trade with specific individuals, groups, and industries. Not following sanctions screening rules can lead to hefty fines and legal issues.

As we mentioned before, sanctions screening is part of the Know Your Customer (KYC) process. Sanctions in KYC ensure careful checking and help reduce risks in fighting financial crime.

How Does Sanctions Screening Work?

Now that we know what sanctions screening is, let’s talk about how it works. Sanctions screening is a process made up of six important steps. These steps help find financial risks connected to current and potential customers, partners, and transactions.

1. Data Collection

First, you need to collect important data. This includes details about customers, potential business partners, and information on transactions. Key pieces of information are names, addresses, birth dates, and nationalities.

2. Data Validation

Once you have the data, the next step is to check that it’s correct. This is done by comparing the information against ID documents, company records, or third-party data sources to make sure everything is accurate.

3. Screening Against Sanctions Lists

Technology helps a lot in this step. It automates the sanctions screening process. The technology checks the collected data against global sanctions lists. This helps to find individuals, organizations, or countries that are under sanctions.

4. Investigation

If there are potential matches, it’s time to dig deeper. You investigate to confirm if the matches are real or just mistakes. This involves checking more client details to tell the difference between false alarms and true matches.

5. Decision-making and Reporting

If you find a true match, you need to file a Suspicious Activity Report (SAR) according to the rules. Remember, not reporting can lead to serious penalties.

6. Continuous Monitoring

These steps aren’t enough if you don’t keep checking regularly. Monitoring can happen in real-time or on a schedule to make sure you’re always following the rules.

Why is Screening Important for PEP Lists?

First, let’s clarify what a PEP list is. Politically Exposed Persons (PEPs) are people in important public positions or those closely connected to them, like family and friends.

Because PEPs have a higher risk of being involved in corruption and bribery, they can be a threat to a company's reputation and financial health. This makes sanctions screening really important for several reasons:

• It helps manage the higher risks tied to PEPs.

• It protects against corruption, bribery, and financial crimes.

• It keeps a company’s reputation and financial health safe.

• It makes sure entities/ firms follow legal requirements.

Top 4 Best Practices in Sanctions Screening

Here are the top four best practices for an effective sanctions screening process:

1. Risk-Based Approach

• Focus on customer risks using a risk-based method.

• Look at factors like location, industry, and sanctions lists to assess risk.

2. Streamline Sanctions Data

• Set clear rules to handle the amount of sanctions data you receive.

• Decide which lists to check and what criteria to use for different customers.

• Use an efficient method for processing and applying the gathered information.

3. Workflow Automation

• Use automation to make sanctions screening more effective.

4. Follow Compliance Best Practices

1. Ensure Comprehensive Data Collection:

• Keep your data collection fresh and thorough.

• Use data enrichment tools to improve data quality, reduce false positives and negatives, and boost screening accuracy.

Use Reliable Sanctions Screening Technology:

• Choose proven technology for sanctions screening.

• Make sure the tech can handle large amounts of data, works well, and is easy to use.

Comprehensive and High-Quality Data:

• Use a wide range of experts to screen data effectively.

Stay Updated on Sanctions Lists:

• Keep up with quickly changing sanctions lists.

• Stay informed about updates to maintain compliance.

Screen Before Hiring and Customer Onboarding:

• Conduct pre-employment screenings for new hires.

• Check customers against sanctions lists to avoid doing business with banned entities and to keep the workplace safe.

8 Challenges in Implementing Effective Sanctions Screening

Here are some challenges that businesses face when trying to implement effective sanctions screening:

1. Data Quality Concerns: Poor quality data can lead to mistakes, causing inefficiency and risking big fines.

2. Handling Large Amounts of Data: Businesses with many customers and transactions struggle to process data quickly.

3. Keeping Sanctions Data Updated: Regularly updating sanctions lists takes constant effort to identify new risks.

4. Resource Investment: Building a good sanctions screening program requires time, money, and people.

5. Staying Informed about Regulations: Global sanctions rules change, making it tough for businesses to stay current and avoid violations.

6. Increased Complexity: There’s growing complexity in restrictive and punitive measures and screening rules.

7. Association Risk: Sanction screening must also consider risks tied to groups that are linked to organizations accused of terrorism.

8. Standards Misalignment: Different sanctioning bodies have various standards, leading to inconsistent economic sanctions.

The Role of Technology in Sanctions Screening

Technology plays a huge role in helping businesses follow AML rules. It’s a great tool for sanctions screening. Here’s how AI and Machine Learning help:

• They automate data analysis.

• They quickly spot risks.

• They adapt to changing patterns.

Also, blockchain technology improves transparency in sanctions screening. It helps reduce fraud risks and increases accountability.

FOCAL's Role in Sanctions Screening

Let’s look at how FOCAL’s automated AML sanctions screening benefits the customer screening process:

1. Efficiency: Automation allows real-time checks during transactions, saving time and effort during screening. This makes the process quick and smooth, improving overall efficiency.

2. Accuracy: Automation reduces human error, ensuring that every match with the sanctions list is checked carefully. FOCAL’s accuracy helps avoid missing important matches.

3. Scalability: FOCAL’s system can handle large volumes of transactions, making it suitable for both big financial institutions and smaller businesses.  

4. Regulatory Compliance: Automated AML sanctions screening helps organizations follow regulations. FOCAL ensures that financial companies meet the necessary rules, promoting a culture of compliance.

Conclusion

In conclusion, it’s important to understand sanctions, their lists, types, and the key role of screening, especially for Politically Exposed Persons (PEPs) and other high-risk customers. Exploring best practices and recognizing challenges shows how essential a strong process is. Technology, like FOCAL platform, transforms sanctions screening by ensuring efficiency, accuracy, and compliance with rules.

FAQs:

Q1. What are the Consequences of Failing to Comply with Sanctions Screening Requirements?

Not following the rules can lead to serious penalties, like hefty fines and potential criminal charges.

Q2. Can Individuals be Subject to Sanctions Screening?

Yes, individuals can go through sanctions screening, especially if they are involved in activities that need close attention, like PEPs.

Q3. What is the role of Due Diligence in Sanctions Screening?

Due diligence is key in sanctions screening. It involves careful investigation and verification to check the risk level of people or entities, ensuring effective risk management.