How to stay compliant with sanctions screening obligations

Breaking down sanctions watchlists screening, know-your-counterparties, and more

Sanctions screening obligations can be complicated for financial institutions to navigate. They can change daily, and there is a lot that goes into building a sufficient sanctions screening process.

On top of that, you don’t just need to screen your own customers for sanctions. You have to screen the counterparties they transact with, too. Sometimes, this is an area that financial institutions overlook, but what’s that old saying? “You are who you hang out with?” The same can be said for your customers and the merchants they interact with.

What are sanctions watchlists?

Sanctions watchlists are lists of sanctioned entities — including people and businesses — suspected of being money launderers, terrorists, fraudsters, human/drug/arms traffickers, or politically exposed persons (PEPs). Sanctions watchlists are managed and enforced by several governmental agencies and international bodies, such as the Office of Foreign Assets Control (OFAC) and the United Nations (UN).

What can financial institutions do to stay on top of sanctions screening obligations?

Put simply: Screen your customers when they onboard, re-screen your customers regularly, screen their transactions, and screen the counterparties they transact with.

You may wonder why screening new applicants against sanctions watchlists during their initial onboarding doesn’t tick the box for watchlist screening compliance. As we were reminded on a large scale last year with the new sanctions against Russia, the sanctions landscape is quick to change due to the volatile geopolitical climate. The best way to make sure that you are staying compliant is to automatically re-screen your existing customers any time there are changes to the watchlists to ensure that they have not been added since they were onboarded, as well as set up monitoring on their transactions on an ongoing basis to ensure they are not doing business with anyone on the watchlists.

What is a counterparty, and why do I need to screen for them?

Move over Know Your Customer; there’s a new KYC in town. It’s time to start putting Know Your Counterparty processes in place. Know Your Customer (and KYB) checks verify who you’re directly doing business with. However, it’s not good enough to just verify who you’re doing business with, you also need to know who your clients are doing business with.

Counterparties are the third-party merchants that your customers interact with. They are important to keep an eye on because financial institutions need to mitigate against direct and indirect sanctions risks. Having visibility into who your customers are transacting with is vital to helping detect money laundering, terrorist financing, etc. — which keeps you compliant and helps you avoid the fines and reputational damage that come along with non-compliance.

What are the consequences of having insufficient sanctions controls?

Non-compliance for having insufficient controls for sanctions screening against your clients and their counterparties can result in monetary fines and penalties — which can range from thousands of dollars to several million — and even prison time. On top of that, non-compliance with sanctions watchlists can often make headlines, leading to reputational damage that results in the loss of clients.

How can Alloy help?

Alloy offers a robust platform where you can conduct initial sanctions checks and monitor ongoing transactions to automatically identify sanctioned actors (whether they be your direct clients or the counterparties your clients are interacting with). We leverage the most up-to-date watchlists by using pre-built integrations with data partners specializing in watchlist screening to ensure uninterrupted compliance.

Our powerful case management tooling will then surface the results in an intuitive UI and allow agents to take prompt action upon suspected hits — whether it be doing further due diligence, suspending accounts, holding payments, or ultimately filing a suspicious activity report.