Sanctions Screening 101

Sanctions screening is a control employed within Financial Institutions (FIs) to detect, prevent and manage sanctions risk, says the Wolfsberg Group. The goal of sanctions screening is to fight financial crime by assisting with the identification of sanctioned individuals and organizations. Sanctions compliance exists as a major element within the broader practice of anti–money laundering (AML) compliance. When performed well, sanctions screening helps identify areas of potential sanctions concern and assists in making appropriately compliant risk decisions.

Sanctions lists are constantly evolving, making them a challenge to keep up with. However, failure to comply can mean large fines and reputational damage. Keeping up with sanctions screening can protect organizations from high-risk individuals and organizations.

Why sanctions screening is important

Any organization that uses the financial system of a sanctioning nation automatically becomes subject to that nation’s sanctions laws.

In the United States, the Office of Foreign Assets Control (“OFAC”) of the US Department of the Treasury administers and enforces economic and trade sanctions based on US foreign policy and national security goals. OFAC regularly sanctions targeted foreign countries and regimes, terrorists, international narcotics traffickers and other parties that pose threats to the national security, foreign policy or economy of the United States. Outside the US, sanctions are commonly imposed by the EU, UK, United Nations and numerous other governmental organizations.

Together, more than 9,000 individuals and entities have had sanctions placed against them since the start of 2022. Considering that volume, organizations need to perform sanctions screening to avoid running afoul of regulators — which happens quite often. In fact, The Financial Times reported that FIs were fined nearly $5 billion in 2022 for anti–money laundering infractions and breaches of sanctions, a more than 50% increase over 2021. And as recently as March of 2023, Wells Fargo was fined $98 million for its involvement in 124 transactions related to sanctioned individuals or jurisdictions.

The focus on sanctions compliance only continues to grow

The US Justice Department announced in March 2023 that it is hiring more than 25 new prosecutors to investigate sanctions evasion. It is also making a “substantial investment” in the department’s Bank Integrity Unit to help investigate and prosecute international sanctions violations.

Beyond the substantial penalties and fines your organization could face when violating sanctions, it could also suffer brand damage, reputational damage and an exodus of customers. As we have all recently witnessed, adverse news about banks travels fast today, and customers can easily and quickly switch banks if they sense even the slightest bit of risk.

How to perform sanctions screening

According to The Wolfsberg Group’s Guidance on Sanctions Screening, most FIs will deploy two main screening controls to achieve their objectives: transaction screening and customer screening. Transaction screening is used to identify transactions involving targeted individuals or entities. Customer or Name screening is designed to identify targeted individuals, politically exposed persons (PEPs), or entities during on-boarding or the lifecycle of the customer relationship with the FI. Together, transaction and customer screening are designed to form a robust set of controls for identifying sanctions targets.

Sanctions screening has become so widespread that the market for AML software grew to an estimated USD 1,395.35 million in 2022. Organizations in all industries, especially in banking and financial services, are using sanctions screening software — solutions like LexisNexis Firco Continuity — to help stay compliant and avoid issues with regulatory bodies. Sanctions screening tools check individuals, companies and organizations against all the significant sanctions lists (including OFAC, UN, HM Treasury and EU Consolidated sanctions lists).

The challenges of sanctions screening

Managing sanctions lists has never been more complicated. With sanctions risk not restricted to a single governmental list, effective compliance with embargoes typically extends beyond list screening. Many sanctioned entities are not explicitly placed on a list but must still be identified. Different governments’ sanctions lists can provide critical due diligence, even if that does not create a legal prohibition.

Organizations have typically sought to meet sanctions compliance needs through incremental technological improvements (such as a new, better screening system), large increases in hiring and exiting high-risk business. However, current screening technologies may offer only marginal improvements in identifying sanctions risk or otherwise require drastic increases in resource needs; high rates of hiring can diminish banks’ return on equity; and exiting risky but important business lines can decrease overall profitability and the ability to retain valuable customers.

Across the banking, insurance and securities industries, false-positive rates in the alerts generated by screening tools can exceed 99%, based on our experience and data shared by clients. Banks directly employ or contract out dozens or hundreds of individuals to manually review these alerts. It is not uncommon that alert review teams (sanctions and anti–money laundering combined) make up 75% of a bank’s compliance staff.

The benefits of automating sanctions screening alerts

Nearly all banks perform some form of false-positive reduction. Currently, this is done either with “good guy” rules whitelisting words, careful selection of settings and algorithms or raising screening thresholds to decrease the number of alerts generated. These methods are time-intensive, require ongoing refinement, and may call into question whether a bank is selectively eliminating alert volumes only because of resource concerns.

AI and machine learning go beyond “good guy” rules and system tuning to eliminate noise. The technology can be trained to study human behavior in identifying false positives and mimic cognitive decision-making. Whereas “good guy” rules need to be redesigned based on slight changes in the transaction text and can have infinite variations, machine learning can re-train itself to account for these changes. Sanctions compliance teams may have different resources reviewing identical or nearly identical transactions; machine learning can detect these similarities and group them together to realize additional efficiencies.

Additionally, sanctions screening is “list dependent” — relying largely on flagging specific names or slight variations in a transaction. AI and machine learning can search for more nuanced patterns of keywords, word omissions, combinations of names and context that may reveal sanctions risk and exposure.

WorkFusion’s AI Digital Workers, Evelyn and Tara, are ready-to-hire automation solutions that work with leading sanctions screening software, dispositioning L1 alerts with greater
efficiency and more comprehensive audit trail than teams of people.

As banks minimize manual review of obvious sanction screening false positives using Digital Workers, highly trained resources can be reallocated to more pressing compliance needs. False positive reduction is as much about risk enhancement and governance as it is about cost.

To learn more, read our eBook, The Risks Of Not Automating Sanctions Screening, and schedule a demo.