Navigating The Complexity of Ownership From The Lens of Sanction By Extension

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Sanctions Screening

27 September, 2023

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Complying with Anti-Money Laundering (AML) regulations is a challenging task. Your business must fulfill government-mandated guidelines by performing Know Your Business (KYB) checks. Furthermore, it is crucial to conduct sanctions screening to avoid doing business with suspected or known individuals involved in illicit practices, such as terrorism, human trafficking, and smuggling.

What is Sanctions Screening?

Sanctions screening in banking and other businesses involves checking whether an entity or individual appears on a sanctions or watchlist. Government and renowned global organizations compile such lists to identify entities or individuals subject to financial sanctions due to their actions or affiliations. Doing business with organizations or individuals on a sanctions list can cause heavy fines. 

What are the Different Types of Sanctions?

  • Explicit Sanctions: Name the subject specifically, whether it is an entity, individual, or country.
  • Implicit or Narrative Sanctions: Do not directly name an entity or individual. Instead, the sanctions implicitly cover them because of their links with a known sanctioned body or sector.

From the economic perspective, sanctions can be categorized  into:

  • Comprehensive Sanctions: Impose restrictions on conducting transactions with a particular country. 
  • Targeted Sanctions: Limit transactions with certain entities, individuals, or people listed on the Specially Designated Nationals and Blocked Persons (SDN) list maintained by OFAC. 
  • Sectoral Sanctions: Impede the progress of certain economic sectors by restricting specific transactions related to such sectors.
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Prominent Governing and Sanctioning Bodies 

Below are the prominent governing and sanctioning bodies across the globe: 

  • United Nations (UN): These sanctions extend to every UN nation-state, imposing multiple restrictions.
  • Office of Foreign Assets Control (OFAC): The sanctions apply to every US citizen, individual, and institution doing business within or linked to the US and those conducting transactions in US currency.
  • European Union External Action Service (EU EEAS): These sanctions apply to every EU citizen and any legal entity established within its member states.
  • His Majesty’s Treasury (HMT): This body maintains the sanctions list applicable to legal entities and individuals working within the country and in accordance with UK law. Such sanctions are enforced by the Office for Financial Sanctions Implementation (OFSI).

How Does the Sanctions Screening Process Work?

Financial firms must fulfill sanctions screening requirements to comply with KYC and AML regulations. Financial services organizations must have an AML sanctions screening program, which should include the following:

  • Mandatory PEP and Sanctions Screening: Deciding which lists to use for screening your new clients is essential. Additionally, consider checking internal sources within your firm to detect high-risk clients, such as Politically Exposed Persons (PEPs), during onboarding.
  • Process for Sanctions List Matches: After identifying a high-risk company, you need a system that helps decide whether to onboard it. In some cases, the customer is immediately rejected; in others, they are designated high-risk but allowed to open an account. A list of criteria must be set to check their eligibility.
  • Managerial and Government Oversight: The program must incorporate your organization’s criteria and governmental standards. Your business is responsible for making wise decisions based on the information available.
  • Corporate Due Diligence: It is essential to perform due diligence to verify the business, pattern of transactions, and source of funds.
  • Risk Assessments: Every entity must be analyzed for the level of risk they may pose. For example, PEPs always pose a high risk if they are allowed to open a bank account. Thus, entities must be checked for adverse media coverage and other indicators of potential problems.
  • Internal Controls: Establishing robust internal controls that work best with AML regulations is crucial. For example, there must be a policy for handling a false positive.
  • Ongoing Monitoring: High-risk clients require more thorough monitoring than other customers. Monitoring their account activity regularly and establishing a comprehensive audit trail is crucial.
  • Ongoing Training: Your staff, responsible for onboarding and risk assessment, must be given ongoing training to stay updated with evolving AML regulations.

Best Practices for an Effective Global Sanctions Screening 

Efficient sanctions screening services must include the following elements:

  1. Risk-Based Approach (RBA): The best sanctions screening process is that focuses on the level of risk that a business may pose.  Risk can be determined by checking a business’s presence on sanctions lists, geographical location, and other criteria.
  2. Efficient Management of Sanctions Data: Delving into sanctions data can be overwhelming without having clear guidelines. Questions like how many lists to check and which ones to use for particular clients are pivotal. After accessing all data sources, it is essential to employ an efficient approach for processing and applying this information.
  3. Workflow Automation: Choose those sanctions screening providers who offer workflow automation. The robust solution can help you check sanctioned entities and individuals in real time, protecting your business from fraudulent activities and heavy non-compliance financial penalties.

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