Top Sanctions Screening Challenges & How to Combat Them

The sanctions landscape is a minefield for financial institutions (FIs). There needs to be more than just awareness of the risk of sanctions and the dangers of violating regulations. It’s a zero-sum game. That’s why employing sanctions screening solutions is more critical than ever.

What is Sanctions Screening?

Banks and financial institutions must identify individuals and entities with high compliance risk levels. That’s where sanctions screening comes into play. Banks and FIs can use sanction screening to identify high-risk individuals and organizations.

Governments impose sanctions to apply financial, economic, or political pressure to businesses, individuals, or other governments for different reasons. Sanctions screening helps financial institutions detect individuals attempting to evade sanctions. These individuals may be money laundering to fund illicit activities. This may include illegal weapons sales, terrorism financing, or human trafficking.

The Sanctions Screening Minefield

For FIs screening against sanctions watchlists can often feel opaque with high-stakes penalties attached. The United States Treasury Department’s Office of Foreign Assets Control (OFAC) issued $1.5 billion in sanctions violations in the first half of 2023 over 17 penalties. That’s considerably greater than any other amount in recent years.

Meanwhile, the United States’ Executive Order 14114 expands sanctions against Russia by targeting Russian banks and financial institutions. The new sanctions specifically target Russia’s military capabilities and restrict the trade of certain items, including diamonds and certain seafood. The order also adds additional sanctions to foreign banks with ties to Russia’s military industrial complex.

To avoid these costly pitfalls, it’s essential to understand why the landscape is so complicated. Read on to understand four key challenges your bank will likely face when screening sanctions and how you can address each.

Challenge #1: The sanctions landscape is constantly in flux

Governments and political entities frequently issue sanctions as a foreign policy tactic against a wide range of targets, including individuals, businesses, organizations, FIs, and government agencies. Authorities issue and remove financial sanctions constantly, meaning they update sanctions watchlists often. Shifting political developments, including the ongoing war between Russia and Ukraine and the expanding conflict in the Middle East, can also create a domino effect that leads to new lists that we must review, update, and monitor.

Adding another layer of complexity is the fact that there are numerous government agencies and political bodies worldwide – including the United Nations, the European Union (EU), and the Office of Foreign Assets Controls (OFAC) to name just a few—that can issue sanctions against a wide range of targets. This means hundreds of organizations in multiple regions rapidly update their respective watchlists.

Solution: Prepare for continuous change

Automation maintains compliance in an environment where sanctions lists are constantly changing. Your bank needs a sanctions screening solution that includes a watchlist management (WLM) functionality that automatically updates relevant data instead of requiring manual updates by human personnel.

To prepare for ongoing change, your organization should embrace “Horizon Scanning.” This means watching for new sanctions that may be coming. China is worried about how it will interact with Taiwan as global events keep getting more intense. Operations and control functions can ensure they are set up to absorb change and prepare to pivot as required.

Challenge #2: Sanctions screening is complicated

Monitoring individuals, businesses, and entities on sanctions lists is just one part of the complex sanctions screening process. Monitoring adjacent actors connected to those on the list adds another layer of complexity to the workflow.

Your organization must monitor for politically exposed persons (PEPs) as part of its screening process. PEPs might not face direct sanctions, but they can work with or closely associate with those on sanction watchlists.

PEPs raise the risk of money laundering and other financial crimes. They might move money for sanctioned people or groups. They are also more susceptible to corruption given their access to, and ability to influence, certain activities. As new payment options like cryptocurrency become more popular, you should stay informed. Understand how people use these funds and how sanctions rules apply.

Solution: Bridge the gap between regulator expectations and operational realities

Staying in tune with regulator expectations will help keep your organization from violating any sanctions rules. Regulators will likely have a set of expectations on the type of business you can conduct and with whom.

With this in mind, consider working with experienced professionals in sanctions compliance who can guide you through new challenges. This includes ensuring your service level agreements (SLAs) don’t compromise your regulatory commitment.

Keeping open communication with regulators will help you understand their expectations. It will also help you anticipate changes in the rules. Talking proactively helps you understand your obligations related to sanctions. It also shows you how the situation may be changing.

Proactively plan to embed new or updated requirements into your organization’s workflows. It is important for you to understand this. It helps you keep your operations compliant with current sanctions rules. It also helps you prepare for new sanctions that may come up.

Challenge #3: Ensure you do not facilitate sanctioned activities

It’s not enough to understand regulatory requirements and adjust your organization’s operations accordingly. You must proactively perform risk assessments to ensure your organization is not unwittingly facilitating or aiding illicit activities.

Robust risk assessments will proactively identify opportunities for bad actors (or affiliates) to use your products or services to facilitate illicit activities. Your sanctions screening solution should be a preventative measure to avoid engagement with sanctioned entities.

Consider taking your screening activities to the next level per identified risks noted during your organization’s risk assessments. Some activities may not need sanctions screening. However, if your risk assessment shows this as a weak spot, using basic controls and screening will improve your risk management.

Solution: Find balance between business and controls

All organizations want to grow revenue and scale their operations. In the world of sanctions, chasing money without care can have serious consequences. If authorities discover that your company helped a sanctioned person or entity, you could face big problems. This includes helping them commit a crime or avoid screening processes.

Doing regular sanctions risk assessments can help your organization follow sanction rules. This process helps you understand all important players. Review the products in your inventory and scrutinize your organization’s activity to ensure appropriate operational controls. Understand how products or new features you offer can assist sanctioned entities or facilitate illegal activities.

Challenge #4: Rules are often unclear, but consequences can be heavy

Conflicting communications only add to sanctions screening headaches. If your organization is headquartered in the United States and operates in a potentially high-risk jurisdiction, US regulators could warn you that you cannot conduct business with certain sanctioned entities in that jurisdiction. That jurisdiction may have its own regulators, who will take a contrary position.

While the rules are confusing, the consequences can be severe. And not just because of the potential fines. Remember, rules exist to stop illegal activities. They help prevent real criminals and terrorist groups from hurting people.

If authorities find that your organization facilitates illegal arms deals, terrorist financing, money laundering for criminals, or aids a human trafficking ring, you will face severe reputational risk. Again, sanctions screening is a zero-sum requirement.

Solution: Serve multiple, sometimes conflicting regulators

The best way to reduce sanctions compliance risk is to use solutions that clearly understand the complex sanctions landscape. Review the jurisdictions where you offer your products and services and the areas in which your firm operates.

You must consider these jurisdictions and the associated watchlists in your screening approach. You can use sanctions screening systems to understand current sanctions. These systems help you review many watchlists.

They also show how existing sanctions affect your operations. These solutions can uncover the ownership details of those in a transaction. This helps show if your organization might work with higher-risk entities.

Sanctions screening technology is making it easier for organizations to prevent violations in the first place. Technology can make sanctions screening more efficient, transparent, and thorough to protect your organization. Utilizing a solution that meets and helps you exceed regulatory expectations is critical.

Resources for Sanctions Screening

• Resource: Unpacking Feedzai’s 2023 State of Global AML Report
• Solution Guide: Intelligent AML Solution
• Solution: Watchlist and Sanctions Screening Tools