Automated Sanctions Screening - Is It Mandatory for Compliance?

A new client applies for an account. Your team performs a manual sanctions check and everything seems fine. But weeks later, you realise your client was added to a government watchlist just days before approval. Now, your institution is at risk of non-compliance with Anti-Money Laundering and Combating the Financing of Terrorism regulations.

To avoid such situations, many institutions rely on automated sanctions screening. But would automation really have prevented this?

In this article we will be looking at automated sanctions screening and discussing the following points:

• Why sanctions screening is mandatory in general
• The different ways sanctions screening can be performed
• The pros and cons of automating the sanctions screening process
• Common challenges for automated sanctions screening
• Which financial institutions can benefit the most from automating their sanctions screening process

Why sanctions screening is important for compliance

As part of the Customer Due Diligence (CDD) process, banks and other financial institutions are required to perform sanction screening. In essence, this means checking whether a new or existing user is under sanctions from a given regulating body.

This is done in order to detect, monitor, and prevent financial crime as well as stay compliant with different international laws. As such, it’s an essential part of Anti-Money Laundering , Combating the Financing of Terrorism and similar regulations. 

Depending on the level of perceived risk, sanctions screening will be more or less rigorous. In other words, if Standard Due Diligence is being performed, sanctions screening will be relatively rudimentary. On the other hand, if Enhanced Due Diligence is performed, both rigorous sanctions screening and ongoing monitoring will be implemented.

Therefore, banks and other financial institutions must have the appropriate measures and controls in place to perform these checks on a regular basis.

How is sanctions screening performed

As with all Customer Due Diligence software, the process can either be performed manually or via automations. However, I would like to make a further division in this case. Namely, there is a difference between performing screening tests individually and in batches, both for the automated and manual approach.

Therefore, the three types I’ll discuss are manual, batch, and automated sanctions screening.

Manual sanctions screening

Manual sanctions screening is performed by the relationship manager/compliance officer manually typing out the name of the client and seeing whether they get a hit from various sanctions screening lists.

The benefits of this approach is that the check is performed in real time. Therefore, the data is up to date and less likely to be utilisng outdated lists. Furthermore, since this approach doesn’t rely on third-party automation software, it’s the cheapest method in terms of operational costs.

Lastly, since the data is handled by a person, they can use their intuition to avoid issues that might stump automation software. For example, executing fuzzy matches or noticing errors such as typos.

However, this approach also comes with downsides. Namely, while a person can use their intuition to solve certain issues, they are also a lot more likely to make a mistake. In this case, the data must then be ratified, creating an unnecessary customer loop and a longer overall process.

Furthermore, while operational costs are lower, employees have to spend a lot more time performing sanctions screening manually. And this can necessitate hiring more staff or having your current staff spend less time on other tasks.

Batch sanctions screening

As mentioned, batch sanctions screening can be performed both through automation and manually. In the case of the former, dedicated software will check all necessary clients after a predefined period and alert the relevant parties if any hits have been found.

In the case of the latter, an employee will run a larger sanctions check and then check the resulting hits manually.  Compared to individually screening customers manually, this is a lot faster.

Furthermore, it will typically require less resources to do a batch check every week than to do hundreds of individual checks every day. Therefore, it can be a very big plus for medium-sized banks and financial institutions.

However, batch sanction screening by design does also come with a time lag. Therefore, a customer can go through the entire onboarding process and then later have to be contacted for additional information if they come up on a sanctions list.

This can then lead to a bad customer experience at best and potentially even compliance issues at worst. Furthermore, if not accounted for, you might experience technical issues during the time the batch screening is taking place as a lot of data would need to be processed at once.

Lastly, if all existing accounts are screened, it can be argued that it’s a waste of resources. Namely, if a client has passed the screening process once and neither their information nor the used sanctions list has been updated, they do not need to be screened again.

Automated sanctions screening

When utilising an automated onboarding or CLM system, sanctions screening will be performed automatically once certain conditions are met. For example, when a new account is created, sanctions lists have been updated, or when key customer data has been updated - such as their location.

Therefore, we can say that this is a lot more optimised than batch screening, as checks are only performed when necessary. Furthermore, automated sanctions screening is going to be up to date and generally accurate, as the checks are performed in real time and the chance of error is smaller when compared to manual checks.

Additionally, the entire process is typically a lot faster - especially if the entire account review and/or onboarding process is automated. And this can be a huge benefit for larger commercial banks or even private banks that often deal with larger transactions and more high-risk clients.

In terms of downsides, the main two people typically focus on is the price and difficulty of implementation. Namely, automated sanctions screening often relies on third parties that come with a licensing fee and will need to be integrated into your overall tech stack.

Furthermore, depending on the software in question, automated screening software can struggle in certain areas. For example, if the software relies on incomplete data sets or isn’t capable of handling fuzzy matches. Therefore, while efficient, automated sanctions screening isn’t always bulletproof. But more on that in the next section.

Common challenges for automated sanctions screening

While utilising an automated sanctions screening process can be beneficial in many ways, properly implementing it can come with a few challenges. For example:

False positives and false negatives

Since automated screening relies on predefined criteria, false positives can occur if the criteria is too broad.  For example, if you run a sanction check based just on the client’s name, without taking other identifiable data into account - such as their date and place of birth.

On the other hand, if the criteria is too narrow, false negatives can occur. For example, if you only count something as a match of the full name, date of birth, place of birth, and passport number all line up - as some lists may not even include all of this information.

Both false positives and false negatives are a big problem as the former can lead to wasted resources and a bad user experience while the latter can put you at risk of non-compliance.

Incomplete or inaccurate data

When performing automated sanctions checks, the software relies on different sanctions lists. For example, the UK sanctions list or the Consolidated list of persons, groups and entities subject to EU financial sanctions, to name a few.

If there is a mismatch between the data available in these sanctions lists and the client information collected during onboarding, errors can occur. A good example of this is when sanctions lists don’t contain enough information to properly identify a person.

The same can be said about disorganised data sets, such as client data being strung across multiple different systems. For example, if a client has recently moved from the US to the UK but the software is only looking for UK matches since it can’t properly pull information from the rest of the client profile.

Exact name matching

On a similar note, relying on exact name matching can lead to errors. This is due to a few reasons. For example, the language used, alternative spellings, the use of aliases, typos, etc.

Generally, well-maintained sanctions lists will try to avoid this issue by providing multiple sources of identifiable data as well as alternative spellings and the client’s name in the source language. However, this isn’t always the case.

Which financial institutions can benefit from automated sanctions screening?

As is the case with any automated software, the main benefit of automated sanctions screening is to reduce labour and make the process faster and more efficient. Therefore, any financial institution that needs to perform a larger number of checks on a daily basis stands to benefit.

For example, a commercial bank with a lot of clients across multiple jurisdictions or a private bank that deals with high-net worth individuals and has to perform account reviews frequently. 

Furthermore, neobanks and fintechs can benefit from this approach as well. This is because they typically have a completely automated onboarding process. Therefore, integrating automated sanctions screening into their overall tech stack is a lot easier than for a commercial bank relying on an outdated legacy system.

Additionally, since these institutions promise a more modern approach to banking, suddenly having a very manual process can seem like a mismatch with customer expectations.

Lastly, banks that are expected to significantly scale up their operations can benefit from automated sanctions screening. This is due to the fact that a large number of new customer onboardings can require a lot of additional resources. And if the process is manual, the customer experience can suffer because of it.

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Conclusion

In conclusion, automated sanctions screening isn’t mandatory for compliance. Sanctions screening is mandatory but it can be performed manually. With that being said, larger or even growing banks, as well as neobanks and fintechs stand to gain a lot more by automating their entire onboarding process.

Therefore, while some challenges are bound to pop up, it’s typically better in the long run to have automated sanctions screening as opposed to doing the process manually. 

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