Money laundering represents a significant global issue. Annually, between 800 billion and 2 trillion dollars, accounting for approximately 2–5% of the worldwide GDP, are funnelled through various illegal channels.

Fintech expert Sergey Kondratenko notes that it undermines economic stability and development and fosters the growth of organised crime and terrorism. Thus, the effectiveness of sanctions screening in combating these issues is crucial for maintaining the integrity of the international financial system.

In the context of tightening international regulations, organisations worldwide recognise the critical necessity of effectively implementing sanctions screening within AML/CFT frameworks to guard against financial crimes, particularly money laundering.

AML and CFT standards are recommended for adoption by all financial institutions, corporations, and even non-governmental organisations. Their purpose is to standardise a general system of preventive efforts to reduce the level of economic crimes and the financing of terrorism.

Sergey Kondratenko emphasises that particularly stringent AML requirements are imposed on banks, money transfer operators, and digital platforms providing payment services. When serving clients who are on sanctions lists, secondary sanctions are possible directly for service operators, accompanied by substantial fines. For instance, in 2023, fines for violating AML procedures exceeded 5 billion US dollars.

Interacting with sanctioned clients is seen as a conscious or unconscious endorsement of financial crimes. Undoubtedly, allowing sanctioned clients access to the economic system poses an additional threat to overall security.

Sergey Kondratenko: The Sanctions Screening Process

Sanctions screening is a component of the regulatory requirements of AML and CFT and is a fundamental part of any organisation dealing with finances.

"This process involves checking client and transaction data against sanctions lists to ensure that the financial institution is not dealing with individuals or legal entities posing a risk under international law," clarified Sergey Kondratenko.

The sanction screening process is carried out by comparing client data against sanctions lists. This procedure is not a one-time event and is conducted regularly to update risk assessments in light of sanctions list updates.

In this sense, sanctions screening extends the KYC (Know Your Customer) procedure. During this procedure, a financial organisation obtains identification data from a client. Depending on the results of these data assessments and increased risk, a more thorough identity check may be conducted, including sanctions screening.

During this procedure, reference data and transactional data are checked, information about recipients and senders of funds is reviewed, matched against sanctions lists, and the level of risk assessed.

Global Sanctions Lists

Sanctions are monitored by several key global organisations, which are compiled into corresponding lists:

  1. OFAC Sanctions List: The agency under the US Department of the Treasury controls various sanctions lists: Specially Designated Nationals and Blocked Persons (SDN List); Foreign Sanctions Evaders List; the Non-SDN Iran Sanctions Act List; the Sectoral Sanctions Identifications List; the List of Foreign Financial Institutions Subject to Correspondent Account or Payable-Through Account Sanctions; the Non-SDN Palestinian Legislative Council List.
  2. US sanctions are based on national security principles against US citizens and target foreign individuals and legal entities, countries of terrorists, and international drug traffickers. Financial and business relationships with these entities are not recommended and may lead to secondary sanctions.
  3. UN Sanctions List: Sanctions imposed by the UN Security Council are mandatory for all UN member states to enforce. Sanctions target specific individuals, legal entities, organisations, countries, and political regimes. The consolidated list contains about 1000 entries.
  4. EU Sanctions List: EU sanctions are primarily political tools to maintain peace and international security. EU financial sanctions are mandatory and may involve restrictions on asset movements, asset freezes, and trade restrictions.
  5. HM Treasury Sanctions List: Sanctions are managed by the Office of Financial Sanctions Implementation (OFSI). This British body coordinates sanction lists and ensures compliance with international financial sanctions legislation in the UK.

    Sergey Kondratenko specifies that each list contains specific targets, countries, entities, and individuals, and the criteria for inclusion can vary significantly from one jurisdiction to another, making compliance a complex but necessary task.

    Additionally, sanctions lists may be maintained by FATF member country governments and non-governmental organisations.

    Sergey Kondratenko: Challenges of Sanctions Screening

    Despite its importance, sanctions screening faces several challenges. The dynamic nature of global politics means that sanctions lists can often change, requiring constant vigilance and database updates for verification.

    Moreover, the volume of transactions and the diversity of data sources require advanced technological solutions. Discrepancies between different jurisdictional lists and definitions can also lead to confusion and errors, complicating compliance efforts.

    Among the problems associated with sanction verification are the following:

    • Absence of a single list—fragmented databases.

    Verification is carried out across multiple databases. After this, data needs to be consolidated into a unified risk assessment. This process can be fraught with errors, especially considering that there are multiple national sanctions lists or lists of non-governmental organisations. Therefore, conducting a truly objective risk assessment takes a lot of work.

    • Dynamics of Changes in Sanctions Lists and Technological Issues

    Globally, the situation changes very rapidly. And the information in sanctions lists is temporary and changeable. Therefore, the problem of sanctions screening can be associated with the need for non-stop checks that monitor changes in real-time. This is a resource-intensive and costly process that may not be accessible to absolutely all organisations that want and need to conduct such analysis.

    • Inaccurate Data Matching and False Positives

    Data verification can be complicated by the technical capabilities of each organisation—how accurate and organised a database is used for verification, how many criteria are used, how they cope with false positives when there is irrelevant name matching (people with the same surname, transcription variations, and spellings of names and titles). Incorrect identification can lead to an incorrect risk assessment and undesirable subsequent actions.

    "Effective sanctions screening requires a reliable system of integration, quality technologies, and thorough data analysis to identify potential risks," explains Sergey Kondratenko. "Such systems must be comprehensive and adapted to the changing nature of global sanctions regimes."

    Sergey Kondratenko: Sanctions Screening Best Practices

    To overcome these problems, institutions must apply best practices that ensure the effectiveness of sanctions screening:

    Synchronisation of verification rules. To avoid violations, it is essential to study and track changes in the verification rules of the jurisdiction where the organisation operates and apply sanctions screening. Knowledge and practices must be synchronised with local legislation.

    Regular updating. Constant updating of all changes in sanctions lists is crucial. Automated systems should be implemented to update these lists in real-time or near real-time.

    Advanced software solutions. Using technologies such as AI and machine learning can assist in accurately matching data with sanctions lists.

    Comprehensive training. Ensuring compliance teams understand the nuances of different sanctions regimes and are prepared for changes.

    Due diligence. Beyond initial checks, continuous monitoring of transactions and business relationships is necessary to identify any indirect violations.

    "As the world becomes increasingly interconnected, the importance of sanctions screening cannot be overstated. It is a key line of defence against the financing of terrorism and the laundering of illegal funds," summarises Sergey Kondratenko. 

    With strict practices and reliable technologies, organisations can protect themselves and the global financial network from significant threats, ultimately contributing to creating a safer, more transparent global monetary order.