Learn what sanction screening is, why financial institutions and other accountable companies need to perform it regularly, the challenges screening can present, and how to solve them.
In March 2023, the US Federal Reserve and Treasury fined Wells Fargo bank $97,8 million for violating US sanctions regulations. And just recently, in December 2024, Aiotec GmbH, a Germany-headquartered company, agreed to pay $14,550,000 to settle violations of OFAC sanctions on Iran.
With penalties for sanctions violations well into the millions, sanction screening is essential for any company seeking to ensure compliance. The 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.
However, surveys including the 2022 Thomson Reuters Anti-Money Laundering Insights show that sanctions screening is a great challenge for many businesses.
Let’s explore what sanction lists are, the types of sanctions out there, who needs to conduct regular screening, and also how to do it effectively.
Sanctions screening is the process of verifying individuals, entities, or transactions against official lists of sanctioned parties issued by governments or international organizations.
These sanctions usually involve measures such as financial transaction restrictions, travel bans, and asset freezes, and are typically imposed by governments or international bodies like the United Nations and the European Union. They target countries, companies, or individuals involved in activities such as terrorist financing, money laundering, or human rights abuses and violations. The goal is to ensure compliance with laws that prohibit business dealings with sanctioned entities. Screening typically involves matching names, addresses, or other identifying details against various sanctions lists. It is often carried out by financial institutions, corporations, or government agencies to prevent illegal financial transactions.
Sanctions screening works by comparing data, such as names, addresses, or other identifying information, against lists of sanctioned individuals, entities, or countries. These lists are maintained by governments or international bodies, such as the US Office of Foreign Assets Control (OFAC), the EU, or the UN. The screening process begins with collecting customer or transaction data and inputting it into a sanctions screening system. This system uses algorithms to identify potential matches between the provided data and entries on the sanctions lists.
Potential matches are flagged as “hits” and require further review to confirm whether they are genuine (true positive) or not (false positive). To reduce false positives, organizations use techniques like fuzzy matching to account for variations in spelling, names, and aliases. Once a true match is confirmed, the transaction is typically blocked, and the suspicion on the entity, organization or individual is reported to the designated person (usually the Compliance/AML officer) by the involved staff member and subsequently the designated person reports to the regulatory authorities. Screening can be applied in various contexts, such as onboarding customers, processing payments, or engaging new suppliers. Automated tools, often integrated with compliance systems, streamline the process, but human oversight is critical for accurate decision-making.
Sanction lists are created by governments or international organizations. They can include persons, jurisdictions, legal entities, or groups which violate international law or conduct illegal activity such as drug or human trafficking, or are suspected for being involved in terrorist activity—including terrorist financing, proliferation of weapons of mass destruction, and more.
Businesses need to follow sanctions regimes, and are therefore required to screen customers (individuals and legal entities), beneficiaries, and other related persons such as close associates or family members in cases specified by law. Here’s when:
Conducting business with a sanctioned person or organization may result in serious consequences for a business, such as:
Other actions, depending on the jurisdiction, e.g. in the UAE it may be banning the violator from working in the sector related to the violation for the period determined by the Supervisory Authority, or license revocation.
The subject of sanctions can vary based on different factors. Some sanctions are aimed at entire jurisdictions (i.e. UN sanctions against North Korea), while others are more targeted (EU sanctions against Hurras al-Din, a Syria-based al-Qaeda affiliated group). There are also sanctions against specific individuals and entities, such as those on the US Treasury Office of Foreign Assets Control (OFAC) Specially Designated Nationals and Blocked Persons List.
Sanctions also differ by sector. For example, EU restrictive measures in view of Russia’s invasion of Ukraine impose restrictions on the following sectors:
Sanctions can also be categorized based on the authority that imposed them:
Here are some country examples of targeted sanctions :
Here are some examples of international sanctions:
More information about the EU sanctions regime can be found on this map.
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In general, all businesses in all sectors should pay close attention to sanctions regimes and have adequate controls in place. Historically, finance has been the primary industry under regulatory scrutiny for sanctions compliance, but now other industries are also under the radar.
As a rule, the following types of businesses should conduct regular sanctions screening against targeted sanctions (including as a part of AML/CFT compliance):
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To comply with a targeted sanction regime, businesses should usually conduct the following procedures:
If a potential match is identified during sanctions screening, the institution should conduct further due diligence measures to verify if the match is accurate. If there’s a true positive match, the institution should determine which action needs to be taken. Here are some actions that can be taken:
Sanctions screening is a challenging process for many businesses. The main problems companies face are:
Sanctions lists can change frequently, even on a daily basis, and regulators are paying extra attention to how accountable institutions comply with sanctions regimes. They are also increasing their expectations around how quickly institutions should implement sanctions changes into their operations.
Solutions:
Sanctions lists are lists of individuals and entities subject to restrictive measures under international and/or domestic sanctions regimes.
Sanctions screening is important, because it ensures compliance with legal and regulatory requirements, it prevents financial crime, and protects organizations from financial penalties, license suspensions and reputational harm.
Sanction screening in money laundering involves identifying and preventing transactions or relationships involving sanctioned individuals or entities to disrupt illicit financial activities.
Employee sanction screening involves checking current or potential employees against sanctions lists to ensure compliance and avoid hiring individuals barred from specific roles or industries.
A sanctions check is the process of verifying whether a person, company, or jurisdiction appears on a government or international sanctions list.
