Sanctions screening involves checking information obtained about a person, entity, goods, or services against sanctions lists that prohibit making funds or financial services available or restrict or prohibit trade in certain goods or services.
The Sanctions Screening
When screening generates an alert, the data is reviewed and assessed. An alert is a review of a hit, or multiple hits, of internal record information checked against sanctions screening lists. One alert generally includes the internal record information and the hits against the various discrete entries on the sanctions lists with the percentage match. This is also called a threshold.
When a true match is identified, or a potential match cannot be discounted, the alert is escalated through a dedicated flow in the screening tool or via other communication channels in the case of manual screening or filtering. The sanctions compliance officer receives the alert, reviews it, conducts further investigation if necessary, and reports as appropriate.
Let’s speak about who and what are the targets of sanctions screening. Unlike anti-money laundering requirements, which are limited to customers of the business, sanctions restrictions apply to all business activities and therefore to third parties. The types of different business activities and, in turn, the types of parties that should be screened include, but are in no way limited to, business arrangements including brokers; agents; vendors and other intermediaries; trade finance and export-related activities; purchasing, order processing, distribution, and payment management; and beneficial owners.
Business Arrangements That Increase Sanctions Risks
There are also some business arrangements that can present and increase sanctions risks, and you should be aware of some risk mitigation techniques. Now let’s speak about a few of them.
Joint ventures and mergers involving multiple parties can present sanctions risks. There are beneficial owners and controllers to consider, as well as the types of goods and services involved and where they came from. It is important to learn the identity and activity of all business parties.
In mergers and acquisitions, businesses “inherit” the sanctions violations committed by the company they acquire. In such cases, checking a business’ sanctions compliance history is an important part of the due diligence that is undertaken before a business is purchased.
When subcontractors and distributors are involved in a project, it is necessary to check their sanctions compliance history, as well as the identity of their owners and directors and the activities in which they engage.
Although brokers and agents are not always physically close and in regular contact with an organization, financial institutions are required to take steps to ensure that these parties, who are acting on behalf of the institution, comply with sanctions restrictions.
Organizations must look carefully at parties and processes related to purchasing, order processing, distribution, and payment management. It is wise not to assume that “back office” activities are not affected by sanctions. Something as simple as a supply contract that permits the payment of third parties that were not identified when the agreement was first signed can result in payments being made to a sanctions target.
Importance Of Establishing A Data Management Cycle For Sanctions Screening
Sanctions screening typically employs both internal and external data sources. Internal data on customers and transactions from a company is compared to external data from sanctions lists and other indicators of sanctioned parties. Due to the large volumes of client and transaction data that financial institutions process on a daily basis, screening internal data against relevant sanction lists can be difficult. To maintain an efficient and effective screening process, a data management process must be updated on a regular basis for relevance and accuracy. Financial institutions may face challenges such as list unification, different writing systems and regional naming conventions, poor data management and manual data processes, and non-integrated IT systems.
The Importance Of Sanctions Screening
While financial institutions such as banks, traders, and insurance companies have always had to comply with sanctions, other members of the maritime industry may find the subject more difficult. Financial institutions have long had compliance programs in place, but the emphasis has now shifted to include others in the global trade ecosystem.
Global regulators emphasize the importance of financial institutions implementing new technologies to improve their AML compliance programs in order to combat financial crime. Automation can expedite the sanctions screening process by completing data collection, analysis, and compliance checks more quickly and reliably, thereby improving the quality and completeness of the screened data. This will assist financial institutions in meeting regulatory requirements while also reducing the amount of manual work, which is expensive and prone to error.