In this ever-evolving world, technology has proved to be a double-edged sword. While affordable and accessible technology has enabled digital inclusion far and wide, companies and customers are becoming increasingly vulnerable to illicit activities and fraud. International regulatory bodies such as the Financial Action Task Force (FATF) address complex and systematic challenges to curb these financial crimes and manage the related issues via several regulations. Anti-money laundering or AML sanction screening is one of the many dynamic and complicated financial regulations that has become more relevant than ever in this volatile geo-political scenario.
If you want to dive deep into the world of AML sanctions and understand its impact on businesses, you are at the right place! Read on.
What is sanctions screening?
Sanction screening is the rules, procedures, policies, and tools implemented to prevent financial crimes, mainly related to anti-money laundering. The parties, people, or businesses flagged are deemed high-risk and are called sanctioned parties. The trade and businesses with the sanctioned parties are sometimes restricted or banned altogether. If not complied with, it can jeopardize national security and expose the entire economy to potential threats.
What is an AML sanctions list?
Simply put, it is a watchlist with collated information listing banned groups, agencies, people, firms, countries, businesses, and their respective sanctions. These lists are extensive and maintained by the regulatory bodies.
Who creates the AML sanctions list?
The AML watch lists are created and maintained by the international governing bodies, which are:
- The United Nations: All UN states are bound to follow and implement sanctions observed by the UN.
- European Union External Action Service: This governing body’s sanctions apply to EU citizens and EU entities across the member states.
- HM Treasury and OFSI or Office for Financial Sanctions Implementations: Sanction lists for businesses or institutions operating within the UK.
- OFAC or Office of Foreign Assets Control: All US citizens and companies worldwide dealing with US-based entities or trading in the US dollar are bound by the sanctions of OFAC.
How does sanction screening work?
A new customer’s information is collected, verified for, and screened against the AML sanctions list.
Types of sanctions screening:
Sanction screening involves multiple steps at different stages of customer acquisition, ranging from something as simple as KYC to ID verification.
KYC and Reference checks:
Basic information is verified and checked with government records and documents provided.
Transaction checks:
Some specific trade or country-related transactions are listed, flagged, and audited.
Name checks:
A delta screening occurs when unusual changes concerning primary information or the AML list are detected.
Special checks:
Special screening is mandated by the regulatory firms or authorities.
Who are your regular culprits?
- Terrorist organizations and entities
- Cyber terrorists and hackers
- Organized crime syndicates or groups
- War-torn or conflicted countries
Challenges faced by businesses while implementing sanction screening:
The data reported by SmartSearch, a UK-based RegTech firm, reveals that only 25 percent of 500 participating companies, such as real estate agents, law firms, mortgage agents, and accounts, regularly check new customers for AML sanctions screening and politically exposed persons compared to 73 percent of companies in 2022. This complacency is more alarming given that it is the financial sector that happens to be neglecting the compliance norms and slipping to an abysmal 22 percent compliance rating in just one year.
Microsoft Inc. had to pay over $3 million for the breach of the OFAC sanctions list for exporting solutions and services. Not only this, the world’s largest cryptocurrency exchange, Binance.com, has also reportedly failed to comply with the U.S. AML sanctions list and report transactions with terrorist groups, including Hamas, on its platform. The company had to pay a hefty fine of $1.8 billion and forfeit $2.5 billion as a penalty.
In light of the Russia-Ukraine and Israeli-Palestine conflict, the Biden Government in the US has issued and approved an Executive Order (EO) to combat emerging digital risks and build an anti-money laundering framework around cryptocurrency and stablecoin. Similarly, Hong Kong is making a licensing plan mainly to tackle threats related to digital asset space. Australia and Singapore, too, are in the process of forming AML sanctions screening for non-finance sectors such as law firms and real estate. While the regulatory authorities are tightening their noose, many C-suite and decision-makers would instead choose to pay heavy fines and have violations slapped on them.
The fight against financial fraud is plagued with challenges and enforcement fatigue. The AML sanctions list is extensive and overwhelming.
Some of the challenges faced by companies while implementing the AML sanctions list are:
Ease of banking and access to payment systems:
While it may be a deciding factor for customers when choosing their banking system, it is often a deterrent to prevent financial services. In a bid to provide faster services and facilitate swift payments, the AML list gets overlooked.
Outdated AML sanctions scanner:
The OFAC guidelines list outdated AML datasets and procedures as one of the top 10 reasons for AML sanctions violations leading to ineffective due diligence and failure to catch high-risk entities in action.
Lack of experience and workforce:
The in-house screening staff is under-trained and overworked. Using outdated solutions doesn’t help either. In such instances, one cannot expect quality monitoring, especially for a cross-border transaction.
Risk-aversion and not risk management:
Rather than managing the risk effectively, banking and financial institutions often get into a risk aversion mode and, hence, put a blanket ban on all and sundry transactions related to a country. Refugees and immigrants often face such violations of human rights when their essential financial assistance is blocked by banks owing to overcompliance.
Inconsistencies across AML sanctions list:
The lists and scope of AML checks differ from one governing body to another. The quality of global sanction data is hard to come by, and so does its compliance.
Language barrier:
The documents and names being in different languages are also a significant barrier in catching a potential risk.
Why does your business need professional and efficient AML sanctions screening?
As the penalties and fines across asset management, banking, mortgage, trading, and gambling companies surge by more than 50 percent, a preemptive strategy is the need of the hour. The advent of cryptocurrency and ease of banking operations have brought a new wave of money laundering and terrorist financing threats. Ensuring that your operations remain clean, efficient, and risk-free is non-negotiable to maintain your reputation and customers’ financial well-being. Here are five reasons why AML sanctions screening is critical for businesses worldwide.
To prevent financial fraud and avoid penalties:
Sanctions screening is a critical process to ensure that you comply with authorities and do your bit to safeguard the global fight against corruption and illicit activities. As a business owner, ensuring your business and customers are protected against financial fraud should be your top priority. By implementing sanctions screening in place, you can identify and block money coming directly or indirectly from sanctioned terrorist organizations and money laundering activities. Besides, failing to comply with the AML check and norms can result in criminal proceedings and hefty fines.
To increase ESG implementation:
Ultimately, the world has realized that ESG concerns can’t be segregated from financial concerns. It is important to address ‘where money is coming from’ to promote responsible investing and avoid money from sources that don’t sit well with your ESG practices. Adhering to AML sanctions screening can help your business achieve that.
To protect the business’ face:
The intent of sanctions screening goes beyond the regulatory perspective and just complying with authorities. In the world of AML sanctions, bad publicity is worse publicity. While your business won’t be applauded for complying with the norms, you can surely face bad press and a negative public image if you miss a sanctioned activity.
To safeguard national security:
Businesses adhering to the sanctions screening norms do their bit to monitor illegal transactions and contribute to protecting national security’s integrity.
To strengthen the global financial system: Effective AML sanctions screening ensures a more robust, faster, and automated financial system that relies on transparency and accountability.
The change in money laundering methods over the years
Money laundering is not a new phenomenon. With time, it has evolved and become complicated. Money exchanges hands via bank accounts and international borders, making tracking tricky. Real estate, shell companies, and offshore accounts have been the weapons criminals use to wash their money. However, as we enter a digital-first era, they, too, have found a safe refuge in digital assets. Cryptocurrency, unauthorized online games, e-commerce websites, and e-cash make tracking and nabbing such financial fraud challenging.
How can businesses overcome the AML sanctions challenge?
A business dealing with money is always at risk of financial fraud. The key is to manage the risk, optimize the resources, and delegate! Leverage Sanctions Database’s reliable and advanced AML screening scanner solution and trained team and bid goodbye to your compliance worries. Until a few years ago, the AML sanctions scanner was implemented by financial institutions or businesses actively dealing with money. However, as the world evolves and the banking system becomes flexible, its scope becomes wide and ever-increasing. At times, when your in-house team should be taking care of mission-critical elements of business, let the Sanctions Database handle your AML sanctions screening worries!
Sanctions Database takes pride in its strong technology framework and consolidated AML datasets. Its core competencies lie in its comprehensive and up-to-date AML-sanctioned data of over 1 million entities, PEPs, and businesses that leave little to no scope for mishaps. Besides, Sanctions Database’s AML screening scanner solution is equipped with reliable transliteration capabilities so that language doesn’t become a barrier to AML name screening. It can automate the process and is capable of handling large volumes of data and minimizing the instances of false negatives and positives.
Leverage the experience of the Sanctions Database team and mitigate potential issues before they become a regulatory risk for your business. Contact Sanctions Database now!