Sanction screening is an imperative aspect of payment processing, helping prevent money laundering, terrorist financing, and other illicit activities.
A financial sanction is a restriction imposed by governments or international organisations which limits or prohibits transactions involving specific countries, companies, organisations or individuals. In payments, sanctions are designed to prevent funds from reaching entities linked to criminal activity, terrorism, money laundering or geopolitical conflicts.
Global jurisdictions have their own standards for sanction screening, and financial institutions deploy compliance systems to analyse transactions before the sender can settle to the receiver.
Sanction screening usually acts as the first compliance layer of a transaction. The process is quick and is analysed in real-time for payments to settle as quickly as possible before either being cleared or blocked.
A flagged transaction will be raised by the sanction screening system if a jurisdiction deems it to be suspicious or high-risk. These transactions, if the sender or receiver has conducted a suspicious payment, can often lead to millions, even billions, of dollars worth of fines and further regulatory action.
The sanction screening process
Once the sending party has initiated a transaction via their preferred payment rail – for example, via SWIFT or FedWire – the relevant financial institution or payment provider performs the sanction screening process through its compliance engine.
This engine will break down the transaction text into data to identify the sender and receiver, as well as the sender’s issuing bank, intermediary banks and scans the remittance data.
Once this data has been scanned and the transaction text has been verified it is passed to jurisdictional compliance software, which checks it against the relevant regulatory requirements and guidelines.
Many bad actors utilising payments for illicit activities often use aliases. The software service scans for any potential spelling mistakes, variations or irregularities from the sender and receiver.
If cleared, the payment moves to a match scoring process, where transaction data is compared against the jurisdictional watchlist. If the resulting score falls within the jurisdiction’s risk threshold, the payment is placed on hold. If it passes, the payment progresses as normal.
As many sanction screening processes utilise AI to rapidly speed up the process, many users have fallen victim to false positives.
This means human intervention is needed for compliance analysis. The investigator will use secondary data to determine whether the flagged transaction is either a false positive or a true positive, reviewing details such as date of birth, nationality, business registrations, among others.
A false positive determination means the investigator will input their findings in a report before progressing the payment. A true positive will keep the payment on pause and be filed to higher ranking figureheads, such as Senior Compliance Managers.
The higher-ranking figurehead will then deliver a final determination and if they deem the transaction to be a true positive, the payment will be indefinitely blocked, returned to the sender, or sent to a frozen account where the funds are put on hold.
The jurisdiction in which the payment was processed determines which punishment is necessary.
The jurisdictions and their standards
For a payment to fall under a jurisdiction’s oversight, the payment sender and receiver must either live or be based in that jurisdiction. The sanction screening process will also fall under a jurisdiction’s oversight if the payment uses the region’s currency.
The Financial Action Task Force (FATF) sets out global standards for many jurisdictions to adhere to. Some of these standards include mandated list screenings, a risk-based approach, immediate freezing of funds of suspicious transactions, and the screening of politically exposed people.
There is also the United Nations’ (UN) Security Council, which outlines mandatory standards for global jurisdictions to follow. This includes adopting a consolidated list to screen customer databases, conduct real-time screening, and standard detailed analysis of payment sender and receiver personal information.
But for a majority of nations, domestic frameworks also play a role.
The US: Office of Foreign Assets Control
Oversee’s payments sending and being received by US citizens, businesses, or using the US dollar. The Office of Foreign Assets Control is one of the largest and most active screeners due to the US dollar being the most traded currency in the world.
European Union: European External Action Service
Enforces the Consolidated Financial Sanctions List which applies to any payment processed within the European Union, regulated entities or any transaction involving the Euro.
The UK: Office of Financial Sanctions Implementation
Part of the three largest sanction screening jurisdictions, including the US and European Union. Previously used the European External Action Service pre-Brexit, but now operates independently and sanctions suspicious transactions autonomously.
While countries such as Australia (Australian Sanctions Office), Canada (Global Affairs Canada), Japan (Ministry of Finance), New Zealand (Ministry of Foreign Affairs and Trade), and South Korea (Ministry of Economy and Finance) share similar standards to the big three, they all run independent screening authorities.
The same can be said for European Union nations, such as France (Direction Générale du Trésor), the Netherlands (Ministry of Foreign Affairs), and Switzerland (State Secretariat for Economic Affairs).
A major financial hub for cross-border payments and international trade, Asian countries all run independent screening sanction bodies which share similarities and differences.
China: Ministry of Commerce
Conducts an ‘Unreliable List’ and enforces anti-foreign sanction laws for suspicious transactions, a notorious country known for housing domestic payments on its own payment rails and suspicious of international payments to and from the country.
Other Asian countries that conduct sanction screening independently include Singapore (Monetary Authority of Singapore), Hong Kong (Hong Kong Monetary Authority), and Taiwan (Ministry of Justice).
Lastly, there are several other global jurisdictions that operate independently and do not share many standards with Western and European Union countries.
- Brazil: Council for Financial Activities Control
- India: Ministry of Home Affairs
- Israel: National Bureau for Counter Terror Financing
- Russia: Federal Financial Monitoring Service
- Türkiye: Financial Crimes Investigation Board
- Saudi Arabia: Presidency of State Security
- South Africa: Enforced by the Financial Intelligence Centre
- United Arab Emirates: Executive Office for Control and Non-Proliferation
