Sanctions screening and sanctions screening process are the words we hear a lot in Anti Money Laundering (AML) and Know Your Customer (KYC) concepts. They are crucial to prevent financial crimes. These financial crimes are especially money laundering and financing of terrorism. Corporations and financial institutions should follow strict compliance criteria to effectively fight money laundering and stop the financing of terrorism. Thus, sanctions screening is one of the vital elements of AML compliance for corporations.
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In this blog, we will discover this crucial term and why it matters closely. Let’s dive in.
What is Sanction?
Before finding out what sanctions screening is, it might be better to find out what sanction is. At the dictionary, it says that a sanction is a threatening penalty for violating a law or rule. In other words, sanctions are a variety of actions designed to influence the behavior of a state, a group, or individuals. They are used to create pressure on governments, groups or people to stop their unethical and unacceptable behavior. Thanks to sanctions, governments can send strong messages to the parties concerned and everyone that they do not accept such behaviors. Furthermore, governments want to prevent others to act in the same way by implementing sanctions.
Some sanction types are as follows:
Economic sanctions,
- Sport sanctions,
- Trade sanctions,
- Diplomatic sanctions,
- Travel or visa sanctions.
What is Sanctions List?
Sanctions lists are lists of individuals, organizations and countries which are the focus of broad or specific restriction actions imposed by national and global sanctions authorities. (United Kingdom, European Union, United States, etc.) Actors in the sanctions lists pose high risk for financial crimes and new actors are added to the lists frequently. Therefore, it is extremely important for firms to frequently check out and have updated sanctions lists. Please note that these lists are publicly available.
What is Sanctions Screening and why it matters?
Sanctions screening is the process of detecting and evaluating individuals, businesses and states by benefiting from various sanctions lists and databases. Sanctions are mostly imposed by states or international associations such as the United Nations (UN) and The Office of Foreign Assets Control (OFAC) by the US Department of the Treasury.
The fundamental goal of sanctions screening is to identify and prevent transactions with sanctioned actors. By screening individuals and companies in these lists, firms will be able to detect potential threats and take effective risk mitigation measures. As a result, they will prevent financial crimes and protect themselves. Moreover, they will avoid working with or doing business with those sanctioned parties accidentally. One other significant reason why organizations should conduct sanctions screening is to stay away from legal and regulatory penalties.
To sum up, sanctions screening is crucial for businesses in terms of several reasons like:
Being compliant with regulations and laws,
Preventing illicit activities (money laundering, terrorism financing, human trafficking, drug trafficking, fraud…),
Safeguarding the company reputation,
Blocking financial losses,
Protecting the national and global financial structur
When should companies implement it?
Companies should implement sanctions screening while
Onboarding new customers,
Hiring employees,
Processing payments and financial transactions,
Doing business with potential partners or suppliers,
Investing in other companies.
Sanctions Screening Process
We went over sanctions, sanctions lists and sanctions screening. Now let’s find out how sanctions screening process works.
1. Effective Data Collection
An organization should first collect the information that is required, such as information on customers, possible business partners, and transaction data, including names, addresses, dates of birth, and nationality.
2. Data Verification
To confirm accuracy, the validation procedure starts after data collection. To maintain data integrity, this is performed via checking against sources such as identification documents, business registrations, or outside data suppliers.
3. Conducting Sanctions Screening with Sanctions Lists
Companies should benefit from technology to make this process easier, automated and more efficient. They should even benefit from AI powered tools in this AI age. Thanks to sanctions screening and AML tools, businesses can quickly compare with sanctions lists if their customers or business partners are subject to any sanctions.
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If there are potential matches with the lists, double check can be done to prevent false positives. In the end, AML/compliance specialists need to decide whether to confirm or reject the actor and act accordingly.
4. Reporting
Reporting is extremely significant in sanctions screening process. When there are matches with sanctions lists, Suspicious Activity Reporting (SAR) should be made immediately. There are specific protocols for SAR and compliance specialists should follow these protocols while reporting.
5. Regular Monitoring
Sanctions lists and regulations are constantly updated. Hence, it is essential for organizations to set up a strong monitoring system to guarantee continued compliance.
In conclusion, sanctions screening is a vital procedure that protects firms from a variety of threats. Businesses ensure regulatory compliance, stop financial crimes, and safeguard their brand by putting sanctions screening into practice. It also strengthens the integrity of the global financial system in addition to reducing financial losses and protecting brand reputation.
Also check out: https://www.formica.ai/blog/kyc-and-aml-in-finance-challenges-and-best-practices