Sanctions screening is the process of checking individuals, entities, or transactions against official lists of sanctioned parties issued by governments or international bodies to identify and prevent dealings with individuals or groups involved in illicit activities such as terrorism, drug trafficking, or human rights abuses. The United Nations’ consolidated sanctions list, for example, includes 670 individuals and 193 entities. Sanctions screening is an important part of how organizations comply with Anti-Money Laundering (AML) and counter-terrorist financing (CTF) efforts and help mitigate financial and legal risks.

Below, we’ll explain why sanctions screening happens, how it works, which types of businesses have to deal with sanctions screenings, and how to navigate this as a business.

What’s in this article?

• Why does sanctions screening happen?
  
• How does sanctions screening work?
  
• Which types of businesses have to deal with sanctions screenings?
  
• How to navigate sanctions screenings as a business
  

Why does sanctions screening happen?

Sanctions screening is an important part of global efforts to combat financial crime, terrorism, and other international threats. It’s a frontline defense against individuals, entities, and countries that have been flagged as potential risks to national security or international peace. Here’s a closer look at why this process matters.

• Regulatory compliance: Many jurisdictions legally require businesses and financial institutions to screen against sanctions lists. Failure to comply can lead to major penalties and reputational damage.

• Risk mitigation: Sanctions screening allows companies to flag transactions involving individuals or entities on sanctions lists, which lowers the chances that companies will do business with them. These risks can include financial losses, legal repercussions, and operational disruptions.

• National security: Sanctions are often imposed for reasons of national security. Sanctions screening can help combat terrorism, the proliferation of weapons, and human rights abuses.

• International obligations: Countries are often bound by international agreements and resolutions that require them to implement sanctions. Sanctions screening is a key part of fulfilling these obligations.

• Reputation management: Engaging in transactions with sanctioned parties can severely damage an organization’s reputation. Sanctions screening helps protect and preserve a company’s brand and image.

How does sanctions screening work?

Here’s how the sanctions screening process works.

• Data collection and preparation: A business gathers relevant customer data, which typically includes names, addresses, and identification numbers, as well as transaction details and beneficial ownership information (info about who or what owns a company). This data is standardized and formatted for efficient screening.

• Screening against sanctions lists: The prepared data is screened against a comprehensive database of sanctions lists from a variety of sources, including government agencies, international organizations, and regulatory bodies. This screening process can involve exact matches, fuzzy logic (finding partial matches with imprecise data), or phonetic matching (matching names that are pronounced the same) to identify potential matches.

• Risk assessment and prioritization: Risk assessments are conducted on any identified matches. The potential risk associated with each match is evaluated based on factors such as the severity of sanctions, the type of transaction, and the customer’s risk profile. Matches are prioritized for further investigation.

• Investigation and due diligence: High-risk matches undergo a more thorough investigation including additional research and due diligence, and, potentially, contacting relevant authorities. This step determines whether the match is a true positive or a false positive.

• Decision-making and reporting: Based on the investigation’s findings, a decision is made regarding the match. If the match is a true positive, appropriate action is taken, such as freezing assets, blocking transactions, or reporting to regulatory authorities. False positives are documented and cleared.

Which types of businesses have to deal with sanctions screenings?

Many businesses must perform sanctions screenings because of their involvement in activities that could intersect with sanctioned individuals, entities, or countries. Here are some of the key industries and sectors that are typically involved in this process.

• Financial services: Banks, credit unions, investment firms, insurance companies, and other financial institutions are at the forefront of sanctions compliance because of their role in facilitating transactions and managing assets.

• Trade and export: Companies involved in international trade and export activities are subject to rigorous sanctions screening to prevent their products and services from ending up in the hands of sanctioned parties or contributing to prohibited activities.

• Legal and professional services: Law firms, accounting firms, consulting firms, and other professional service providers must screen their clients and transactions to avoid facilitating illicit activities and ensure compliance with Anti-Money Laundering (AML) regulations.

• Real estate: Real estate agencies and property developers are increasingly required to perform sanctions checks on potential buyers and investors to prevent money laundering and the acquisition of assets by sanctioned individuals.

• Technology and telecom: Technology companies and telecommunications providers must screen customers and transactions to prevent the provision of services to sanctioned entities or individuals involved in cybercrime or other illicit activities.

• Nonprofit organizations: Nongovernmental organizations (NGOs) and charities are also subject to sanctions screening to ensure their funds and resources are not diverted to sanctioned groups or used for prohibited purposes.

• Energy and commodities: Companies involved in the energy and commodities sectors such as oil, gas, and mining are subject to sanctions screening because of the high-risk nature of these industries and their higher potential for involvement in sanctions violations.

Sanctions screening can also be relevant for businesses in sectors such as transportation, manufacturing, and retail, especially if these businesses conduct international transactions or work with customers or suppliers in high-risk jurisdictions.

How to navigate sanctions screenings as a business

Here are some best practices for keeping up with sanctions screening requirements and processes as a business.

• Develop and implement a comprehensive compliance policy that outlines the procedures for sanctions screening. This policy should define roles and responsibilities, describe the screening process, and establish protocols for dealing with potential matches.

• Conduct thorough due diligence on all clients, partners, and transactions, especially those that involve high-risk countries or sectors. More intensive due diligence might be necessary for complex business relationships or large transactions.

• Stay informed about the latest sanctions and regulatory changes by reviewing updates from relevant authorities such as the United Nations, the European Union, and the US Office of Foreign Assets Control (OFAC). Sanctions can change frequently in response to geopolitical developments. Subscribing to regulatory updates or using compliance services can help keep you up-to-date.

• Consider using sanctions screening software to simplify your compliance process and reduce the risk of human error. Look for software that you can integrate into your existing systems and that can handle large volumes of data with high accuracy. Update the software regularly to reflect any changes in sanctions lists.

• Regularly audit your sanctions screening process to identify any weaknesses or gaps in your compliance program. These audits should assess the effectiveness of your screening tools, the adequacy of staff training, and the thoroughness of your compliance policies. Consider hiring external auditors for an unbiased review.

• Prepare for false positives, which are alerts that initially seem like a match but are ultimately not. You can prepare for this by having clear procedures in place to investigate and resolve these alerts and prevent unnecessary disruptions to your operations.