Best Practices: Transaction Screening and Sanctions Compliance
For companies processing international payments, regulators increasingly scrutinize anti-money laundering (AML) and know-your-customer (KYC) procedures to enforce sanctions and regulations. Understanding international payment screening requirements isn't a choice—it's a necessity to avoid costly regulatory fines and reputational risk. This guide offers insights into transaction screening's core aspects, emphasizing best practices for compliance.
International Transaction Screening Requirements
The volume and speed of money crossing international borders is accelerating to keep pace with globalization. But, each transaction is a potential avenue for money laundering or terrorist financing.
Payment screening is essential for compliance and maintaining the global financial system's integrity and security. This process prevents illicit finance and upholds trust in the financial ecosystem. Key aspects of its broader significance include:
Preventing Misuse of Funds: Screening halts funding for illicit activities, safeguarding financial stability.
Maintaining Trust and Security: Ensures transactions are legitimate, crucial for the financial ecosystem's reliability.
Upholding International Standards: Facilitates compliance with global financial regulations, enabling seamless global transactions.
Preventing Economic Disruption: Blocks funding to entities threatening economic stability and national security.
Protecting Reputation: Averts reputational harm by adhering to AML, KYC, and sanctions standards.
Adapting to Evolving Threats: Proactively counters emerging financial crimes.
Who is Responsible for Payments Screening?
Entities that facilitate or process cross-border transactions, like banks and cryptocurrency exchanges, must comply with KYC and AML regulations and screen against sanctions. Global regulatory oversight is stringent, with non-compliance leading to heavy fines and reputational damage. Key bodies and regulations enforcing these standards include US OFAC, the EU’s Anti-Money Laundering Directives, the Financial Action Task Force (FATF) overseeing global actions against financial crimes, and the Wolfsberg Group, which develops financial crime risk management frameworks. Their roles highlight the critical need for diligent screening in international finance.
Which Transaction Information Must be Screened?
Sender: Every transaction starts with a sender. Verifying that the sender is not subject to sanctions is the first step in ensuring the transaction is legitimate. This includes screening the sender’s name, address, and other identifying information if included in a transaction message.
Receiver: As you'd like to know the sender, the receiver's identity is equally vital. Institutions must screen the receiver’s name, address and other identifying information if included in a transaction message.
Sending, Receiving and Intermediary Institutions: In a world where financial institutions can vary from long-standing banks to new-age digital wallets, understanding the credibility of both the sending and receiving entities is essential. Transaction messages will include identifying information for each institution involved in a transaction, such as an Bank Identifier Code (BIC) / SWIFT number of Bank Identification Number (BIN). BIC codes must be screened along with the institutions address information.
Transaction Payment Details and Additional Information: When available, payment details included in a transaction record should be checked for potential sanctions violations.
Case Study: Sending Remittances
An individual in the UK wants to send money to a relative in Japan. They use a third-party international payment provider because of its favorable exchange rates and low fees. The sender initiates a transfer from their UK bank account to the relative’s bank account in a Japanese bank.
The UK bank must verify the sender's name, ensuring the individual has a legitimate account and the funds for transfer. The Japanese bank will need to ensure that the recipient's name matches the details provided by the sender, ensuring the funds don't route to an unintended party.
The UK bank must be recognized and trusted by the Japanese bank to facilitate the transfer between the sending and receiving institutions. Similarly, the UK bank must ensure the receiving bank in Japan is credible. Ideally, both banks have security and screening protocols to prevent illicit transactions.
In this simplified scenario, the sender's and receiver's information and the institutions facilitating the transaction play critical roles in ensuring the legitimacy and security of the transfer.
Sanctions Lists: The Core of Payment Screening
Global regulatory bodies maintain detailed sanctions lists, identifying individuals and organizations associated with criminal activities and national security threats, and compliance is necessary for developing a comprehensive sanctions screening strategy. Essential lists for such screenings include the following sanctions lists issued by major sanctions-issuing authorities collectively known as the ‘big four’:
US Office of Foreign Assets Control (OFAC) Specially Designated Nationals (SDN) List
United Nations (UN) Sanctions List
European Union (EU) Sanctions List
UK Sanctions List
In addition to the big four, it's critical to incorporate any local lists pertinent to the transaction's origin and destination. For instance, a US-based international payment processor handling a transfer for an Argentine company to a French entity should not only screen against the 'big four' but also consider local Argentine and French lists. By doing so, the payment service ensures full compliance with international regulatory standards and mitigates associated risks.
Transaction Screening vs. Transaction Monitoring
Transaction Screening: This is the frontline check conducted by an institution before a transaction is executed and when an institution receives the transaction. Like a security check at an entrance, this process validates that the sender, receiver, and other parties to a transaction are not subject to sanctions. A red flag at this stage prevents harmful activity from progressing further.
Transaction Monitoring: Separate from sanctions compliance, transaction monitoring continuously reviews transaction behaviors to identify patterns over time and detect anomalies. This primarily focuses on identifying money laundering, fraud and other financial crimes.
Both processes are distinct and crucial components of a comprehensive AML strategy, ensuring that fintech platforms remain secure, trustworthy, and compliant with international regulations.
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The Necessity of a Comprehensive Transaction Screening System
Relying solely on manual oversight is an oversight. The rationale for a modern transaction screening system is compelling:
Adaptive Speed: Sanction lists are dynamic and evolve in response to the global political and economic climate. A screening system that can update in real-time is not a luxury—it's a necessity.
Precision & Efficiency: Beyond catching suspicious transactions, it's crucial to discern the benign from the malicious accurately. Continuous false positives disrupt operations, erode user trust, and inundate compliance teams with unnecessary tasks.
Diverse Regulatory Landscapes: Many countries maintain unique transaction screening requirements and sanctions lists. A transaction screening solution must have global sanctions coverage and the ability to customize transaction screening parameters.
The MidFirst Bank Case: A Lesson on the Importance of Real-Time Compliance
In 2022, a notable case highlighted the importance of maintaining up-to-date transaction screening processes using real-time data. OFAC issued a Finding of Violation to MidFirst Bank, an Oklahoma City-based financial institution, after processing payments for individuals on the SDN list.
The violation focused on MidFirst Bank processing 34 payments for two individuals added to OFAC's List of Specially Designated Nationals and Blocked Persons (commonly called the "SDN List"). OFAC designated these individuals at 12:36 PM on September 21, 2020. Between 2:00 PM and 5:48 PM the same day, MidFirst Bank processed five transactions totaling $604,000 for the sanctioned individuals. Ninety-eight percent of the 34 transactions, including two internal book transfers of $400,000, occurred within six hours of the designations. MidFirst was only notified that these customers were designated by its sanctions screening vendor 14 days after OFAC announced the sanctions.
The root cause of the violation was MidFirst Bank’s sanctions data was up to date. Moreover, the bank did not understand the limitations of its sanctions screening vendor. This resulted in a regulatory infraction that could have been avoided by implementing robust sanctions screening systems with frequently updated sanctions data.
The case serves as a stark reminder for all fintech companies and financial service providers about the critical nature of transaction screening for sanctions compliance. Not only is it essential to screen transactions, but it's equally important to understand and regularly verify compliance vendors’ data quality and update speed.
We wrote this guide to show your team everything you’ll need to cover during the buying process. Learn to select the right screening system to reduce false positives and meet your CFT/AML compliance needs.
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