Real-Time Compliance for Instant Payments: FedNow and SEPA
Speed is the new currency, and compliance must keep up.
With over 1,000 institutions on the FedNow network, instant payments are the new standard. Customers expect funds to settle in seconds, 24/7/365. But behind that convenience lies a growing challenge for banks and fintechs: real-time compliance.
Legacy AML and sanctions screening systems, built for batch processes and manual reviews, weren’t designed for payment windows that close in under 10 seconds. The result? A costly tradeoff: delay the payment—or let it through without adequate checks. Either way, institutions are exposed to risks they can’t afford.
This article breaks down the compliance gaps in the instant payments space and why real-time sanctions screening is no longer optional. We’ll discuss:
How FedNow and SEPA are rewriting the rules for compliance;
Why legacy systems are fundamentally unfit for real-time risk screening; and
What actionable strategies compliance leaders can implement now to close the gap.
Regulatory Expectations: FedNow, OFAC and SEPA
Warren Buffett famously said, "It takes 20 years to build a reputation and five minutes to ruin it." In the world of instant payments, financial institutions may not even have those five minutes to identify and stop a sanctioned transaction.
The most striking feature of both FedNow and SEPA (Single Euro Payments Area) frameworks is what they don't explicitly say. Neither scheme categorically mandates real-time sanctions screening—yet both create an environment where real-time screening becomes a practical necessity. Let’s take a closer look.
FedNow compliance requirements
Federal Reserve Banks require FedNow Participants to meet specific compliance requirements when offering instant payments service. The FedNow Service Operating Rules closely align with the compliance expectations already placed on federally supervised financial institutions under applicable laws and regulatory standards.
It recommends that “Participants must maintain:
Compliance programs that are consistent with applicable anti-money laundering and sanctions laws and reasonably designed to manage compliance risks associated with FedNow Service activity;
Customer due diligence programs consistent with Financial Crimes Enforcement Network (FinCEN) standards;
Reasonable procedures for screening customer information against current sanction lists and updated lists to the extent customers might be a party to a FedNow Service transaction.”
In short: if you're already subject to federal oversight, FedNow won't lower the bar—it reinforces it.
OFAC compliance requirements for instant payments
While OFAC acknowledges that speed is fundamental to instant payments, it also makes one point unequivocally clear: Faster payments do not reduce sanctions compliance obligations.
In its September 2022 guidance on sanctions compliance for instant payment systems, OFAC urged financial institutions to adopt a risk-based approach and align their compliance controls with the unique risks of real-time settlements. Institutions must ensure that their compliance technology and sanctions screening processes are capable of detecting and preventing suspicious transactions in real time.
SEPA Instant Credit Transfer requirements
Under EU sanctions regulations, sanctions obligations apply equally to traditional and instant payments, there’s no exemption for speed. However, like its US counterpart, the SCT Inst Rulebook emphasizes operational requirements but offers limited guidance.
It requires banks and Payment Service Providers (PSPs) to immediately identify if customers are subject to financial sanctions. But with the complexity of EU Official Journal updates, doing so in real time is far from straightforward. We’ll unpack why shortly.
Cross-border participants face additional complexity due to:
Different technical standards and messaging formats
Varied regulatory expectations across jurisdictions
Complex data protection requirements that may limit information sharing
Overlapping and sometimes conflicting sanctions regimes
Key Challenges of Sanctions Compliance in Real-Time Payments
Compliance teams face mounting pressure to screen high volumes of transaction data in under 10 seconds—a tall order. From legacy system constraints to data quality gaps and the complexity of cross-border payments, the challenges are both technical and operational.
Legacy workflows and infrastructure weren’t built for speed
Traditional sanctions screening was designed for a world where payments took days, not seconds. When payments settle in under 10 seconds, screening after-the-fact creates dangerous regulatory blind spots. Many institutions rely on screening infrastructure designed for batch processing rather than real-time operations.
These legacy systems often can't:
Scale to handle 24/7 operation
Process individual transactions in milliseconds
Handle variable transaction volumes efficiently
Update sanctions data in real-time
More critically, the traditional approach of routing suspicious transactions to manual review queues becomes impractical when customers expect immediate settlement.
The accuracy vs. speed dilemma
Compliance teams face an impossible choice: maintain thorough screening and risk missing instant payment SLAs, or expedite payments and potentially miss sanctions hits.
False positives create particularly acute problems in instant payment environments. Each millisecond spent reviewing a false match directly impacts customer experience.
This dilemma becomes even more challenging in 24/7/365 processing environments, where traditional staffing models for compliance teams prove insufficient. While payments continue round-the-clock, many institutions struggle to maintain equivalent coverage for sanctions alert reviews.
The pressure to meet these expectations has led some institutions to implement overly permissive screening parameters or, more alarmingly, to bypass certain screening steps entirely during peak processing periods, creating substantial regulatory exposure.
Data quality issues
In data-driven compliance, you're only as good as your worst data point—and in instant payments, bad data shows up fast. For example:
Payment messages in both FedNow and SEPA formats often contain truncated or incomplete counterparty information compared to traditional wire transfers or correspondent banking transactions.
Transliteration challenges become magnified when processing international names in real-time.
The compressed timeframe eliminates opportunities for data enrichment that compliance teams traditionally rely upon.
These limitations increase the risk of both false positives and false negatives, exposing institutions to compliance failures.
Cross-border complexity
For institutions operating in both SEPA and US payment corridors, the challenge is multiplied. Fragmented enforcement lists and different risk expectations create a patchwork compliance landscape that's difficult to navigate at speed.
The European Union alone maintains over 40 different sanctions regimes, with updates published in the Official Journal that may take 48-72 hours—and in some cases, even weeks—to be reflected in commercial screening databases. This "update gap" creates a window of vulnerability for institutions processing instant payments.
Current Gaps in Compliance Readiness of Financial Institutions
Most real-time payment processors offer no embedded sanctions screening capabilities, pushing compliance responsibility entirely to participating institutions. Many financial institutions acknowledge a clear gap between their current compliance capabilities and what instant payment systems demand. These gaps typically fall into three areas:
Screening timeframes: Inability to complete comprehensive screening within required settlement windows, particularly problematic when institutions must process thousands of transactions per second during peak volumes.
Data refresh cycles: Sanctions list updates occurring too infrequently (often 24+ hours with legacy solutions), creating dangerous blind spots between sanctions list updates during periods of heightened geopolitical activity.
Alert handling capacity: Insufficient resources for round-the-clock alert investigation while maintaining the 10-second settlement windows.
As a result, institutions are forced to choose between delaying payments—undermining the value of instant transactions—or taking on elevated compliance risk.
However, the consequences of these gaps are increasingly severe:
Regulatory risk: Instant payments don’t exempt firms from sanctions obligations. Compliance failures can trigger enforcement and heightened oversight from regulators.
Reputational damage: Processing a flagged transaction, even if reversed, can harm trust and brand reputation.
Operational friction: Manual reviews, rejected payments and false positives slow down operations.
Customer churn: Delays or failures in real-time payments lead to lost confidence and potential customer loss.
How to Improve Real-Time Sanctions Compliance
Achieving effective sanctions compliance in real-time payment environments requires rethinking both processes and technology. Forward-thinking institutions are implementing multi-faceted strategies to minimize downstream delays, reduce alert volumes and keep the payment experience seamless.
Embedding real-time compliance before the payment is authorized
The most effective compliance happens before a payment enters the system, not after it's already in flight. This preventative approach includes abandoning the traditional 24-hour update cycle in favor of continuous sanctions list monitoring and near real-time implementation of regulatory changes. Advanced sub-second screening algorithms with dynamic risk-based matching capabilities are essential for maintaining both compliance and speed in the instant payments ecosystem.
Leading institutions are replacing batch processing with synchronous API calls that return instant screening results, supported by cloud-native architectures that scale with transaction volumes and maintain performance during peak periods.
Automated data enrichment
Limited information available in instant payment messages necessitates sophisticated data enrichment strategies. Supplementing global sanctions databases with automated enrichment and authoritative external sources like corporate registries and law enforcement data significantly improves real-time match accuracy.
Tools that enrich watchlist data with additional identifiers, such as addresses, aliases, Legal Entity Identifiers (LEIs), dates of birth, ownership links, etc., enable faster, more accurate screening decisions.
Additionally, advanced name-matching algorithms further improve screening accuracy in global payment flows by accounting for cultural naming conventions, transliteration differences and deliberate name variations designed to evade detection.
AI-powered efficiency
With settlement windows measured in seconds, instant payments don’t allow time for manual review. Every unnecessary alert triggered by outdated or imprecise screening systems delays settlement. With no time for manual intervention, banks must deploy screening tools built for speed, accuracy and scale.
Agentic, explainable AI can autonomously triage and resolve low-risk alerts, applying transparent, auditable logic to reduce false positives and keep payments moving. With Open Banking making provider-switching frictionless, institutions that fail to deliver a seamless payment experience will quickly fall behind.
Comprehensive audit infrastructure
Instant payments demand auditability at speed. Automated systems must generate real-time logs, document alert justification and produce auditor-ready exports on demand. Integrating audit trails into the workflow ensures every sanction check, override or alert decision is traceable and defensible, even in high-volume, high-speed environments.
Flexible controls per risk profile
Not all payments carry equal sanctions risk. Screening solutions must enable financial institutions to apply differentiated controls based on factors like risk threshold, transaction speed, dynamic list selection, customer tiering, and more. Tailored, risk-based settings help preserve speed on low-risk flows while tightening controls where needed.
For instance, institutions may:
Apply stricter controls to higher-risk payment corridors (e.g., international vs. domestic payments) or customers with a history of heightened scrutiny;
Use different sanctions lists for different payment types or regions; or
Apply more intensive screening for high-risk customers (e.g., PEPs or politically exposed persons).
By implementing these strategies, financial institutions can transform the compliance function from a potential bottleneck to a competitive advantage in instant payment environments.
Castellum.AI in Action: Real-Time Sanctions Screening for Instant Payments
Castellum.AI is built for real-time compliance at scale.. It is designed to meet the speed, volume and accuracy demands of FedNow and SEPA Instant Credit Transfer without compromising regulatory expectations.
5-minute data refresh: Our global sanctions database updates every 5 minutes, far surpassing industry-standard 24-hour cycles, to reduce false negatives and ensure screening reflects the latest designations.
Direct-from-issuer sources: We ingest updates directly from government issuers—often before public announcements—ensuring first-mover visibility.Automated data enrichment: Our patented process automatically cleans and standardizes unstructured watchlist text and extracts key identifiers like IDs, dates of birth to accelerate decisioning even on incomplete payment messages.
Jgram matching algorithm: Our patented engine reduces false positives by up to 94% compared to legacy screening vendors.
AI-powered automated alert review: Castellum.AI’s explainable AI agent instantly resolves low-risk, level 1 alerts, ensuring real-time payments aren’t delayed.
Audit-ready governance: Real-time logs, configurable controls and exportable reports support full traceability and regulatory defensibility.
Real-time payments demand real-time compliance. Anything less puts your institution at risk. Don’t let outdated systems create compliance gaps.
