Sanctions screening is a critical control primarily implemented by financial institutions to detect, prevent, manage, and mitigate financial crime risks.
It’s important that firms conduct thorough and effective screening as part of their financial crime compliance efforts, so as to assist with the identification of sanctioned individuals, groups, and organizations, as well as any illegal activities to which they might be exposed, such as money laundering. In short, sanctions screening helps firms to identify potential sanctions risks and assists in helping compliance teams make quick, compliant decisions.
What are sanctions?
A sanction is an action usually implemented by governments and official bodies such as regulators to prevent access to certain services. In this case the financial system of a country. Sanctions are imposed with a view to change behavior, prohibit illicit activity, and curb undesirable actions by certain high-risk persons or groups. As we’ve seen recently with the recent conflict in Ukraine, sanctions can even be imposed against entire countries.
Nowadays, sanction lists are growing faster than ever as the definition of sanctions is broadening and becoming more open to interpretation. This is making it more difficult for all firms, not just those operating in finance, to effectively identify and manage their sanctions risks, and it has never been more difficult to do this due to a variety of factors. These include:
The evolution of sanctions lists: As governments rely more on sanctions as a foreign policy tool, new entities are constantly being added to and removed from sanctions lists. Over the past few years especially, the average number of sanctioned entities has grown across all major lists.
Sanctions are becoming more complex: Although sanctions historically targeted only specific named entities, we’re seeing more and more narrative and sectoral sanctions which target specific sectors and prohibit specific activities. This leads to uncertainty and ambiguity, thus making compliance more challenging.
Sanctions having impacts beyond sanctioned entities: Organisations that are owned and controlled by, or work with, sanctioned entities also need to be within the scope of compliance efforts. Although these entities might not be directly sanctioned, their relationship with the sanctioned entity could present a risk.
The variety of sanctioning bodies and sanctions lists: There’s a multitude of sanctioning bodies, including individual nations, regional unions, regulatory bodies (e.g., HMRC, OFAC), and international organizations (the EU, the UN), all of whom publish their own sanctions and sanctions lists. Naturally, these don’t always align.
Why sanctions need to be taken seriously
It’s crucial for all firms to comply with sanctions screening requirements and implement adequate controls. That said, it’s particularly important for firms operating in heavily regulated industries such as financial services.
Historically, enforcement actions have been more prominent here, but other sectors have also been the recipient of significant fines and other punitive actions by regulators that have far-reaching power and influence. We’re also seeing regulators increasingly turning their attention to other industries that have historically flown under the radar.
As for what can be done, regulators and enforcement agencies can impose heavy fines not just for direct sanctions violations but also for any failure to implement adequate controls. Firms must carry out effective sanctions screening against third parties and their associates, partners, and the wider supply chain. This becomes especially important in jurisdictions with strong links to sanctioned countries - usually thanks to political activity or geographical proximity.
When should sanctions screening be performed?
Firms need to be able to keep up with the constantly changing sanctions landscape to remain compliant. To manage sanctions risk effectively, they also need to screen their suppliers, partners, and customers (both existing and new) and transactions against multiple sanctions lists. This can be challenging for larger companies that have many partners, customers, and transactions flowing through them.
Most firms find that sanctions screening is easier to manage after the initial onboarding risk assessment when onboarding a new customer or other third parties. In addition, firms should ensure that their existing customers are regularly screened to maintain compliance against the ever-changing sanctions landscape.
Any potential matches should be addressed as a matter of urgency, following a clearly defined process for escalation to compliance teams and reporting to the relevant regulatory body. It’s a good idea for firms to also have clearly defined managerial responsibility for sanctions compliance given that regulatory authorities are now beginning to apply much deeper levels of scrutiny to controls and procedures.
Transaction monitoring and sanctions screening go hand-in-hand
Although transaction monitoring primarily refers to the process of observing customer transactions in real-time and/or retroactively to spot trends, it can be paired with sanctions screening to verify customer identities and watch their transactions on an ongoing basis.
This is called ‘transaction screening’ and its goal is to identify risk in senders and beneficiaries, as well as other factors of a transaction before it transforms into a compliance problem. Essentially, transaction screening watches the senders and receivers of funds to ensure that they’re not being processed on behalf of a sanctioned entity.
One of the most effective ways to do this is to screen and analyze as much data as possible so as to strengthen and streamline decision-making. In today’s digitized world, the only way to do this is through the implementation of an automated transaction monitoring tool like Sentinels.
Sentinels makes transaction screening a faster, simpler, and more accurate process by providing firms with full-time, 360-degree automated coverage. Backed by state-of-the-art artificial intelligence and machine learning, our tool streamlines compliance workflows to allow efficient and confident decision-making.
It also helps firms to accelerate the remediation process by keeping everything in one central location, thus enabling compliance teams to exercise full control in reviewing activity, managing alerts, and remaining in line with compliance obligations.
If you’re interested in how a tool like this could support your compliance team, request a free demo of our transaction monitoring solution today.