What is Watchlist Screening?

What Is Watchlist Screening?

Watchlist Screening refers to the process of checking entities against watchlists such as sanctions lists, PEP (Politically Exposed Person) lists, and adverse media in order to identify high-risk or prohibited entities. In this post, we will cover the most important details of Watchlist Screening. 

What Are the Main Global Watchlists?

· UN Sanctions List – The UN Sanctions List encompasses certain entities that are subject to measures like asset freezes, travel bans, or other arms embargoes. It allows all member states to easily implement and enforce sanctions because it consolidates names from multiple UN Security Council sanctions. It can be viewed on the UN’s official website.

· OFAC SDN (US) – OFAC (The Office of Foreign Assets Control) is an office within the U.S. Department of the Treasury and is responsible for administering and enforcing economic sanctions. The OFAC SDN List encompasses individuals, companies, vessels and entities involved in some type of criminal acts such as terrorism, narcotics trafficking, human rights abuses, cybercrime, and other threats. Companies and individuals under U.S. jurisdiction are prohibited from doing business with anyone on these lists. You can access this list on here.

· EU Sanctions List – EU sanctions under the EU’s Common Foreign and Security Policy aims to protect EU Member States from various threats like the ones we have mentioned in the OFAC SDN, which also includes both the EU’s autonomous sanctions and United Nations Security Council resolutions. You can find its Sanctions Map on here.

· UK OFSI List – The Office of Financial Sanctions Implementation’s consolidated list includes individuals and entities that are subject to asset freezes, investment bans, or other financial restrictions. Let’s give an example on The OFSI’s strictness. This year, it imposed a penalty of £465,000 to London-based law firm Herbert Smith Freehills due to payments made to sanctioned Russian Banks. You can search its continuously updated list on HM Treasury.

· Interpol Red Notices – INTERPOL issues red notices to locate and arrest a person pending extradition, surrender, or similar legal action. However, it is not an international arrest warrant, it is up to each country to decide under its own laws. These Red Notices are publicly accessible if the requesting country agrees and can be easily viewed through.

· World Bank Debarred Firms – The World Bank Listing of Ineligible Firms and Individuals refers to entities and persons that are prohibited from participating in World Bank contracts during specified periods. Debarment is the most common sanction you may come across on its lists. Entities may face cross-debarment from other multilateral development banks as well. The World Bank publishes the list publicly, to which you can access through World Bank. 

How Does Global Watchlist Screening Work?

The process actually varies from organization to organization, but we will try to give a general rundown. First, you have to collect the information of an entity through official documentation and then verify their identities through processes such as Know Your Customer and Know Your Business. After this part is over, the collected information of the entity gets scanned against several watchlists. This is exactly where the importance of matching logic comes into play due to possible variations of the names. Through fuzzy-matching algorithms, both false positives and false negatives can easily be mitigated. Once this part is over, you will be notified if there is a match and you can decide if it is a genuine risk or not. 

Why Is Watchlist Screening Important for AML?

To begin with, watchlist screening is not optional. Several global regulators such as the FATF (Financial Action Task Force) require Watchlist Screening. If you do not comply, you are likely to receive significant penalties. 

Let’s give an example to show what could happen in case of a non-compliance. According to Reuters, The UK’s Starling Bank was fined 29 million pounds due to weak money-laundering controls and sanctions screenings systems. In fact, the FCA stated that the bank had opened more than 54,000 accounts for 49,000 high-risk customers. In addition to being an obligation, it also plays a very crucial role in helping you avoid reputational damage by blocking fraud and terrorism financing attempts. 

What Regulations Require Screening?

The most prominent global regulators require Watchlist Screening through various laws. However, depending on your jurisdiction, you are likely to comply with additional regulations. So, you should check local KYC/EDD laws as well. Now, let’s describe the key ones. 

· FATF Recommendation 6, 7, and 10: Recommendation 6 and 7 require countries to implement UN Security Council sanctions lists, while FATF Recommendation 10 requires customer due diligence, which includes name screening as well.  

· 5AMLD (EU): The EU’s 5th AML Directive and later requires entities such as banks, financial institutions, lawyers and auditors to apply customer due diligence and ongoing monitoring, which includes screening customers against EU sanctions lists as well.

· OFAC Regulations, BSA, and USA PATRIOT Act: These prohibit U.S. persons from dealing with entities on OFAC’s SDN List. Additionally, the Bank Secrecy Act and USA PATRIOT Act require financial institutions to implement Customer Identification Program, Customer Due Diligence, and Ongoing Monitoring. 

What It Means to Be Listed on a Watchlist?

Being on a watchlist means that a person, company, or vessel is identified as a high-risk or sanctioned entity. They may receive asset freezes, travel bans, and blocked financial access depending on the watchlist. 

Who Needs Watchlist Screening?

Again, this depends on the regulations you need to comply with. However, these more often than not include financial institutions, fintechs, virtual asset providers, exporters/importers, government contractors, NGOs, charities, and professional service providers (Law firms, accountants, auditors, real estate agents, casinos, dealers in precious metals and stones).

Who Are on the Watchlist?

These lists encompass terrorists, criminals, corrupt officials, sanctioned companies, vessels, and fugitives. These are often identified by governments, the UN, or global institutions. It should be kept in mind that some lists may include high-risk but not criminally sanctioned individuals as well. 

Best Practices for Watchlist Screening

Use Comprehensive Sources: First of all, we advise you to add as many reliable sources as possible, because this way you are more likely to identify high-risk individuals. You can also supplement official watchlists with PEP databases and adverse media.  We should note that you should update databases daily or in real time because watchlists change very frequently. 

Implement Effective Matching Techniques: We have already mentioned the importance of fuzzy logic in catching name variations, transliterations, and aliases. It can especially help when onboarding customers with non-Latin alphabet names. 

Consider Risk-Based Approaches: While some specific approaches can be overburdening for specific customers, others can prove to be insufficient. In order to automatically adjust your approach, tailor screening depth to the factors like customer profile, geography, and product. 

Real-time Screening: You should also prioritize checking transactions and new customer onboardings against watchlists because this way, you may prevent processing prohibited payments or onboarding sanctioned clients before exposure occurs. 

Combine Automation and Manual Reviews: Both of these approaches have their own advantages and disadvantages. So, consider combining both of them to balance their positives and negatives. 

Maintain An Audit Trail: Regulators such as OFAC and FCA expect you to prove how you handled alerts. Therefore, you should store logs for at least 5 years. The length depends on the regulation, so check both local and global regulators.  

Red Flags to Watch for Watchlists

Let’s start with the red flags of customers. They may provide unusual or incomplete identification documents, act reluctant to provide information, show up as a Politically Exposed Person. Furthermore, they may insist on using cash or virtual assets, pressure the company for rapid transactions, or use a third party paying on behalf of a customer without presenting a valid excuse. When it comes to transaction red flags, we may exemplify these with payments to or from high-risk jurisdictions such as Iran, Russia or Syria, unnecessarily complex payment chains, frequent use of shell companies or offshore structures, and unusual transaction size or frequency for the customer profile. 

There are several other red flags concerning each stage of a business relationship such as, having the same address with a blacklisted firm, multiple accounts under similar names, IPs in embargoed regions, changes in vessel name or IMO number, ship-to-ship transfers in high-risk zones, concealment of cargo itinerary, trade routes through sanctioned countries, direct ties to high-risk jurisdictions, and many others.  

Common Challenges

One of the most common challenges we hear from our clients during watchlist screening are the false positives due to the reasons like similar names and transliterations. Besides false positives, false negatives caused by missed entities are not rare to encounter during watchlist screening processes as well. To mitigate these risks, make sure that you are using proper fuzzy matching and filters. Aside from these, watchlists may come in different formats. This may make it difficult to integrate across systems. Similarly, different jurisdictions may have overlapping but not identical lists, which creates additional compliance complexities. 

Lastly, we believe it is worth reiterating that update delays because lists change frequently and any delay in updating these lists creates a serious exposure risk. So, ensure that you are using a software solution that updates your watchlists continuously and in regular intervals.