According to the U.S. Department of Justice, the annual cost of white collar crimes ranges between $426 billion to $1.7 trillion. These staggering figures are lost every year due to the revenue lost in money laundering, corporate tax fraud, telecommunications fraud, insurance fraud, loan fraud, hi-tech crimes, and corporate financial crimes. These massive stats compel international bodies like FATF to regulate and issue legislation to increase transparency in the global financial system and maintain the integrity of its institutions.
To curb financial crimes and terrorist financing, both governments and international institutions issue a list of sanctioned persons, countries, and groups. Sanctioned persons could be anyone involved in illegal activities like human trafficking, money laundering, drug trafficking, or waging an unprovoked war as in the case of Ukraine. For instance, Putin and his oligarchs are sanctioned by the Western countries after the invasion of Ukraine. North Korea is an example of a sanctioned country that is not complying with international laws and threatens international peace. ISIS is an example of a sanctioned group that has a terrorist infrastructure all across the globe.
Therefore, banks and other financial institutions are obligated by the regulatory bodies to obtain information about their clients in the beginning of their legal relationship. And keep conducting their due diligence processes during their relationship. Sanction screening is one of the protocols of Know Your Customer (KYC) and Anti Money Laundering (AML) measures recommended by government bodies and international organizations. In order to meet the sanction checklist screening requirement, financial institutions like banks use the comprehensive data obtained from their due diligence processes and screen it against the sanction lists and watchlists issued by government agencies and international financial institutes.
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International Bodies and Countries That Issue Sanction Lists:
- The Office of Foreign Assets Control (OFAC) issues sanctions in line with U.S laws and operates under the US Department of Treasury
- The United Nations (UN) Sanctions were issued following the UN Charter.
- The European Union (EU) Sanction List was issued following the EU laws.
- The UK Sanction List was issued following the UK regulations.
- The Australian Sanction List was issued following Australian law.
- The Swiss Sanction List was issued following Swiss regulations
These global sanction lists from various countries and organizations are updated constantly as new sanctions are released depending on the geopolitical situation. The onus is on the financial institutions to regularly screen their customers, and their transactions against the updated sanctioned lists to maintain AML compliance and avoid hefty fines.
Drawbacks of Typical Sanctions Screening
Last year, the survey conducted by Thomson Reuters Anti-Money Laundering Insights revealed that financial institutions, for example, banks, struggle with sanctions screening the most and declared it as the topmost disruption for financial organizations. For example, since Russia invaded Ukraine, the use of economic sanctions as a political tool to stop war has made it difficult for financial institutions to comply with the Western-imposed sanctions.
The challenges include:
1. Wrongly flagged False Positives: Manual reviews take time and human effort, which as a result decrease the efficiency of business operations.
2. Delayed Updates in Sanction Screening: This increases the risk of doing business with freshly sanctioned entities and slows down other operations.
3. Confusing cross-checking of sanctioned entities: Correct screening of variations in local names across multiple languages, and their spelling differences complicates the sanction screening process which may cause an increased number of false negatives and even miss the legitimate matches.
4. Screening large set of data: The sheer task of screening colossal amounts of data from different countries in multiple languages slows down the screening process and causes delays in compliance.
5. Delays caused by inaccurate false positives due to manual screening will result in a bad user experience.
Why Should Banks Prefer Automated Sanctions Screening?
On a bright side, the positive news for the banks is that now automated sanctions list screening solutions are available in the market to bring efficient results in their compliance efforts and equip themselves with the right tools to avoid hefty fines and the risk of providing banking services to the sanctioned entities. The sanction list screening software scans people from different data sources, which includes client records, transaction details, and watchlists issued by government agencies and international financial institutions. When this sanctioned list Check finds a suspicious match, it flags it right away so that it can be investigated by the authorities.
Automated sanctions list screening system assist banks in simplifying compliance procedures, reduce manual efforts by compliance officers, provide structured information, and process the sanctions checklist screening effectively.