The modern financial landscape is highly regulated and organizations are being put under pressure to avoid the illegal use of financial resources and adhere to the international regulations of financial institutions. A sanction screening system is one of the most crucial controls in any compliance system. With the growth of sanctions regimes and their increased strictness, AML screening of sanctions is no longer a choice but a regulatory requirement.
Financial institutions, fintech companies, marketplaces, and other regulated organizations are required to make sure that they are not operating business with sanctioned individuals, entities, or jurisdictions. Otherwise, it may lead to serious fines, loss of reputation, and limitation of operations.
What Is Sanctions Screening?
Sanctions screening refers to the screening of customers, transactions, and counterparties against global sanctions lists that are put forward by regulatory bodies. These lists single out individuals, organizations, vessels, and countries to which there are economic or trade restrictions.
An effective sanctions screening system will allow organizations to identify possible matches in real time or during periodic reviews so that they can block prohibited transactions and continue to remain in regulatory compliance.
Sanctions screening is an essential element of AML sanctions screening, which collaborates with customer due diligence (CDD) and KYC, as well as transaction monitoring.
Introduction to the OFAC Sanctions List
The OFAC Sanctions List, which is held by the U.S. Office of Foreign Assets Control, is one of the most popular databases of sanctions. OFAC oversees and implements economic and trade restrictions in accordance with the American foreign policy and national security objectives.
Three categories of the SFAC Sanctions List are:
- Special Designated Nationals (SDNs).
- Discontinued entities and persons.
- Approved nations and territories.
The non-U.S. companies might be forced to comply with the rules of the OFAC even when they do not do business in U.S. dollars, do not use U.S. financial institutions, and are not exposed to the market in the U.S. This renders the compliance programs of global sanctions to include the use of OFAC screening as an important aspect.
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The Secondary Sanctions and Their Effects Around the World
In addition to primary sanctions, secondary sanctions are also imposed by the regulators, which extends the areas of enforcement a great deal. Secondary sanctions are imposed on non-sanctioned parties that are involved in some activities with sanctioned persons, entities or jurisdictions.
To illustrate, a non-U.S. company can be punished, deprived of access to the market, or limited in case it does business with a company that is listed under U.S. sanctions. This has rendered secondary sanctions to be a significant issue to international banks, fintechs, and cross-border platforms.
A sophisticated sanctions screening system assists the organizations in detecting the risks of indirect exposure and minimizing the chances of breaching the secondary sanctions.
The Reason Why AML Sanctions Screening Is Necessary
AML sanctions screening is an important tool that helps to avoid money laundering, terrorist financing, and other financial crimes. The regulators require organizations to screen:
- Customers in the onboarding process.
- Customers who are already established on a continuous basis.
- Transactions in real time
- Third-party partners and vendors.
Screening through manual means is no longer adequate because of the increasing number of data and regular changes in the lists of sanctions. Sanctions screening systems are automated, fast, accurate and scalable and smart matching and rules about risk reduce false positives.
Major Characteristics of a Successful Sanctions Screening System
A contemporary sanctions screening system must consist of:
- The global sanctions lists are screened in real-time.
- Coverage of other international regulatory bodies (OFAC).
- Fuzzy logic and advanced name-matching.
- Continuous list updates
- Regulatory review audit trails and reporting.
- IDEO interoperability with wider AML compliance.
These features enable compliance departments to detect risks at the first stage, respond in a timely manner, and show compliance with the regulations.
Conclusion
Organizations have to bolster their compliance defenses as sanctions regulations keep on changing. Effective AML sanctions screening is based on a reliable sanction screening system, which assists businesses to meet the obligations of the OFAC sanctions list, exposure to secondary sanctions and minimizes the risk of financial crimes. Organizations that invest in sophisticated sanctions screening solutions can ensure that they are not subjected to regulatory fines, their reputation is not damaged, and they can operate freely in the international financial ecosystem.
