In March 2023, Wells Fargo bank faced a staggering $97.8 million fine from the US Federal Reserve and Treasury for violating US sanctions regulations. Just two months later, crypto firm Poloniex agreed to pay $7.6 million in a settlement with OFAC (Office of Foreign Assets Control) for violating 66,000 sanctions.
With penalties reaching into the millions, sanctions screening has become an essential practice for companies seeking compliance. This process aims to detect, prevent, and manage risks related to financial crimes by checking individuals and/or entities against national and international sanctions lists. Sanctions screening is also a key component of AML/CFT compliance regulation.
Understanding Sanction Lists
Sanction lists are created by governments or international organizations. They can include persons, entities, or groups violating international law or conducting illegal activities such as drug and human trafficking or suspected terrorist activities, including financing, proliferation of weapons of mass destruction, and more.
Businesses need to follow sanctions regimes and are required to screen customers (individuals and legal entities), beneficiaries, and other related persons in cases specified by law, such as:
· Prior to onboarding new customers
· Upon KYC reviews or changes to a customer’s information
· Before processing any transaction
· Upon any updates to national and/or international sanctions lists
Conducting business with a sanctioned person or organization may result in serious consequences, including security breaches, regulatory fines, legal action, reputational damage, or other jurisdiction-specific actions.
Types of Sanctions
Sanctions can vary based on a range of factors. They can target entire jurisdictions (e.g., UN sanctions against North Korea) or specific individuals and entities (e.g., US Treasury OFAC Specially Designated Nationals and Blocked Persons List). Sanctions can also be sector-specific, affecting industries like finance, energy, transportation, arms trade, and more.
Sanctions can be imposed by national governments or international organizations, such as the United Nations and the European Union, targeting persons, organizations, or countries posing threats to international peace and security.
Businesses Requiring Sanctions Screening
While historically, finance has been under regulatory scrutiny for sanctions compliance, other industries are now also under the radar. Businesses that should conduct regular sanctions screening include:
· Financial institutions (FIs)
· Designated Non-Financial Businesses and Professions (DNFBPs), including casinos, real estate agents, precious metals and stones dealers, legal professionals, accountants, and trust and company service providers.
· Virtual assets service providers (VASPs)
Complying with AML Regulations
To comply with targeted sanction regimes, businesses should:
· Screen all customers, related persons, and transactions.
· Conduct analysis to determine matches, true positives, false positives, and more.
· Take appropriate actions when potential matches are identified, such as limiting services, freezing assets, or reporting to regulatory authorities.
Challenges and Solutions
Sanctions screening poses challenges such as handling large amounts of data, language-related complexities in sanctions lists, limited resources, and increased regulatory scrutiny. Solutions include finding reliable service providers with large databases of sanctions and AML lists, ongoing monitoring, automated screening tools with fuzzy matching algorithms, and employee awareness training.
In conclusion, sanctions screening is crucial for regulatory compliance and risk management. Companies should adopt best practices to navigate this complex landscape effectively.