This guide delves into all aspects of sanctions screening, including the regulatory landscape, the significance of sanctions screening, the requirements and challenges involved, and best practices for implementing a sanctions screening program.
With the increasing complexity and scope of international sanctions, companies need to ensure they have effective sanctions screening processes in place to avoid significant legal and financial repercussions related to money laundering and terrorist financing.
However, many businesses struggle with understanding the requirements and challenges of managing sanctions screening and sanctions risk. With different sanctions lists to consider, varied regulations to comply with, and the potential for significant financial costs and penalties, businesses are in search of guidance to navigate this complex process.
In this article, we will provide a comprehensive guide to sanctions screening and best practices to ensure your business remains compliant. We will cover the regulatory landscape, the importance of sanctions screening, the requirements and challenges of sanctions screening, and best practices for implementing a sanctions screening program. By the end of this article, you will have a better understanding of how to effectively manage the complexities of sanctions screening and protect your business from financial crime.
Sanctions screening is the process of screening individuals and entities against lists of sanctioned parties. Sanctions lists are compiled and maintained by governments and international organizations, such as the United States’ Office of Foreign Assets Control (OFAC), the United Kingdom’s Office of Financial Sanctions Implementation (OFSI), the European Union’s Consolidated List of Person, Groups and Entities Subject to EU Financial Sanctions, and the United Nations’ Security Council Consolidated List. These lists identify individuals, companies, and organizations that are subject to sanctions for a variety of reasons, including, among other things, involvement in war, money laundering, terrorism, narcotics trafficking, human rights abuses, and weapons proliferation.
Sanctions screening is a required control to prevent illicit transactions by prohibited entities or individuals seeking access to the financial system. It is required by law in many countries, including the United States, Canada, the United Kingdom, and the European Union to name a few. Failure to comply with sanctions regulations can result in significant financial, legal, and reputational risks for businesses. Penalties for non-compliance can include fines, and in the most severe cases can lead to loss of business licenses, and even criminal charges.
Microsoft: In April 2023, Microsoft was fined $2,980,265.86 for exporting services and software from the United States to sanctioned jurisdictions and Specially Designated Nationals (SDNs) in violation of OFAC’s Cuba, Iran, Syria, and Ukraine/Russia-related sanctions program. By not identifying end users, OFAC found Microsoft to have failed to prevent the use of it’s products by sanctioned parties. (Source OFAC: read more)
BitPay, Inc.: In 2021, BitPay, Inc., a bitcoin payment processor based in the United States, was fined $507,375 by OFAC for 2,102 apparent violations of multiple sanctions programs. OFAC found that BitPay had processed digital currency transactions on behalf of individuals in sanctioned jurisdictions, including Cuba, North Korea, Iran, Sudan, and Syria, among others. (Source: OFAC – read more)
Standard Chartered Bank: In 2019, the FCA fined Standard Chartered Bank £102,163,200 for failures in its anti-money laundering controls and sanctions screening processes. The FCA found that Standard Chartered had failed to adequately identify and manage the risks associated with customers who may have been involved in sanctioned countries, including Iran, Syria, and Zimbabwe. (Source: FCA – read more)
Société Générale: In 2018, Société Générale S.A. was fined $53,966,916 by OFAC for violating US sanctions against Cuba, Iran, and Sudan. OFAC found that Société Générale had processed transactions on behalf of sanctioned parties, and had failed to implement adequate sanctions compliance policies and procedures. (Source: OFAC – read more)
These examples highlight the importance of effective sanctions screening processes and the serious consequences of non-compliance with sanctions requirements. Companies that operate in multiple jurisdictions need to ensure that they have effective sanctions screening processes in place that address local and global regulations to avoid legal and financial repercussions.
Businesses are required to not conduct business with sanctioned individuals and entities. To do so, they are required to screen all customers, vendors, UBOs, employees and other entities that they do business with against certain government-maintained sanctions lists depending on the jurisdiction in which they operate. Sanctions screening, also referred to as name screening, should be conducted during the know your customer (KYC) process and on a regular basis and must be documented to ensure compliance.
In addition, businesses should also screen transactions for potential sanctions violations. This applies to financial transactions such as payments or loans, as well as non-financial transactions such as the exchange of goods or services. In addition to screening the sender and recipient of a transaction, businesses must also screen any intermediaries involved in the transaction to ensure that they are not subject to sanctions. This process is known as transaction screening.
To adhere to sanctions screening requirements, businesses must conduct screenings against all pertinent global sanctions lists and watch lists in all jurisdictions where they conduct operations. It’s essential to note that if a business conducts transactions in US dollar, it falls under US jurisdiction, and thus must comply with US sanctions regulations. For example:
It is also recommended for businesses to screen against the United Nations Security Council Consolidated List and other lists relevant to their region or industry.
Sanctions list data is typically available on government websites and from data providers like Dow Jones and World-Check. It’s important to keep up to date with changes to sanctions lists, as newly sanctioned entities are added and removed on a regular basis.
Setting up a sanctions screening program involves several steps, including:
In addition, we suggest that you consider the Compliance Commitments Framework provided by the Office of Foreign Assets Control (OFAC).
Sanctions screening can be a challenging process for businesses due to various factors that can impact its effectiveness. Some common challenges include:
Addressing these challenges requires financial institutions and other businesses to implement the appropriate tools and processes, such as high-quality data management, advanced screening algorithms, and regular updates to sanctions lists. Additionally, businesses need to establish clear compliance procedures, including record-keeping, escalation workflows, and the use of case management tools to ensure that sanctions screening processes are carried out effectively and efficiently.
Implementing an effective sanctions screening program is crucial for businesses to comply with regulations and avoid penalties. To ensure the effectiveness of their sanctions screening program, businesses can work with FinScan Consulting Service, which provides expert guidance to evaluate and improve their sanctions screening existing program.
At FinScan, we are dedicated to providing cutting-edge sanctions screening solutions tailored to our clients’ unique needs. With our powerful screening software and extensive sanctions database, we can help your organization achieve regulatory compliance and peace of mind. Contact us today to learn more about how we can help with your sanctions screening needs.