A Guide to Sanctions Screening and Sanctions Lists
The list of sanctions grows longer daily, and the sanctions published by the various issuing bodies sometimes coincide. In addition, the definition of sanctions is becoming broader and broader, leaving more and more room for interpretation. This makes it more difficult for companies to effectively identify and manage sanctions risk. Our best practice guide to sanctions review provides useful advice to help you overcome these challenges.
Complexity of sanctions risk managing
| Challenge | Description |
|---|---|
| The sanctions lists are constantly evolving. | As governments increasingly turn to sanctions as a means of foreign policy, new entities are constantly being added to or removed from sanctions lists. Over the past 5 years, the average number of designated entities has increased significantly. |
| The nature of the sanctions is becoming increasingly complex. | While they used to target only specific named entities (states, ships, aircraft, organisations, and individuals), narrative and sectoral sanctions have now been introduced, targeting specific sectors and prohibiting certain activities that leave more room for interpretation. |
| Links between sanctions. | It is important to remember: sanctions are not limited to the entities themselves. Organisations owned or controlled by sanctioned entities must also fall within the scope of sanctions lists and compliance programmes. In addition, customers who are not on a sanctions list but have a relationship with a sanctioned entity may also pose a risk. |
| Multiple sanctioning bodies. | There are multiple sanctioning bodies with their own sanctions lists. The multiple sanctioning bodies, including sovereign states, regional associations, and international organisations such as UN, each publish their own sanctions, which are not always consistent. |
Relevant Sanctioning Bodies
For the companies based within EU, the main sanctions authorities are the European Union, HM Treasury, the US Office of Foreign Assets Control (OFAC) and the UN Security Council. In addition, depending on the territories in which they trade, the currencies in which they trade and their partnerships and alliances, companies may also need to consider other sanctions bodies.
EU Consolidated List of Sanctions (EU)
The EU consolidated list of sanctions applies to all EU citizens, wherever they are located in the world and corporate entities constituted in a member state.
HM Treasury Sanctions List (UK)
The UK consolidated list of financial sanctions targets applies to all individuals and legal entities who are within or undertake activities within the UK’s territory, and all UK nationals and legal entities established under UK law, including their branches (irrespective of where their activities take place).
Office for Financial Sanctions Implementation (OFSI) is responsible for ensuring UK sanctions are implemented and enforced.
OFAC Sanctions List (US)
The specially designated nationals and blocked persons list (SDN) applies to all US citizens, wherever they are in the world, corporate entities constituted in the US, any entity that trades in US dollars, uses US goods or components, has a US parent, subsidiary or affiliate and/or work through a local agent or supplier with a US connection.
UN Sanctions
The United Nations Security Council sanctions list applies to all UN Nation states.
Companies and industries need to screen for sanctions
All businesses in all sectors are required to comply with the sanctions check requirements and therefore must have adequate controls in place. Historically, enforcement actions have been more prevalent in the financial services sector, but other sectors have also been subject to significant fines and some regulators are increasingly focusing their attention on other industries. For example, the Office of Financial Sanctions Implementation (OFSI) has published guidance on financial sanctions for charities and non-governmental organisations. Failure to comply with sanctions or to obtain the correct licence in the case of export controls can result in significant fines.
Law enforcement agencies can impose fines not only for sanctions violations, but also for failing to have adequate controls in place. This means that companies must ensure that they effectively screen not only direct third parties, but also their partners, beneficial owners, and extended supply chain for sanctions, particularly in regions known to have strong ties to sanctioned countries.
The way sanctions screening works
Sanctions screening involves matching individuals, groups, or companies against specific sanctions lists based on the territories in which an organisation operates, the currencies in which it trades, and its partnerships and alliances. This can be done by manually entering a name into an online search tool, by mass screening a customer database for sanctions alerts, or by periodically automatically checking customer and stakeholder databases.
When should a sanctions screening be conducted to ensure compliance with sanctions?
Companies need to be able to keep up with the ever-changing sanctions landscape in order to remain compliant. To effectively manage sanctions risk, companies need to review their customers (both existing and new) and payment transactions against multiple sanctions lists, which can be challenging, especially for high volumes.
Sanctions review should be a top priority after the initial risk assessment when adding a customer or third party. In addition, firms should ensure that existing customers and third parties are regularly reviewed to ensure compliance with the dynamic and ever-changing financial and trade sanctions. Potential compliance issues should be addressed urgently, with clearly defined processes for escalation. All companies must have clearly defined responsibilities for sanctions compliance, as regulators are now scrutinising controls and procedures much more closely than ever before.
Challenges related to sanctions screening
The real challenge for many companies is not only to track down customers who are on sanctions lists and prevent them from doing business with the company, but also to avoid disrupting legitimate customers in their customer relationships and undermining the efficiency of the company’s operations.
Under or over-screening
If organisations do not screen thoroughly, there is a risk of ‘false negatives’ where companies subject to sanctions slip through the net.
Conversely, over-screening can lead to organisations producing a large number of ‘false positives’ where non-sanctioned companies are flagged as potentially sanctioned. These ‘false positives’ take time and resources to confirm they are not sanctioned.
A screening engine must be able to accurately match the company’s risk exposure and screening rules, as well as handle inaccurate or imprecise data. Machine learning technologies can be used to automate the routine elimination of false positives.
Equivalence
It used to be a common case when companies relied on a third party for sanction compliance or “equivalence”. But it is not acceptable anymore to work in the same format.
For example, banks historically relied on their correspondent banks’ sanctions checks for mutual customers. Companies should seek advice from their professional advisers where appropriate.
Divergence
In certain cases, economic sanctions imposed by different sanctions authorities are inconsistent. For example, OFAC and the EU have different stances on sanctions against Iran. OFAC has decided to reinstate sanctions against Iran, while the EU continues to grant sanctions relief and encourage EU companies to do business with Iran.
If the company is doing business with another company that is sanctioned by one agency but not another, they should be extra cautious and conduct additional checks.
Main tips needed for effective sanctions screening
Prepare the customer data well
Financial crime compliance costs have escalated, requiring a greater focus on operational efficiency in KYC/AML. It is highly recommended to streamline data collection processes, create common data pools and invest in enriching customer and third-party data.
Use proven, reliable technology and software to support sanctions checks
Solutions should be able to handle multiple lists, perform batch screening, and set up predefined searches tailored to an organisation’s risk and policies.
Check against high-quality and comprehensive sanctions data
Screening activities should be based on extensively researched and constantly updated global risk information that includes the latest PEP and sanctions lists, negative media reports and enforcement reports from around the world.
Benefits of Using LEI for Sanctions
LEIs (Legal Entity Identifiers) are crucial for understanding parties involved in financial transactions, thereby aiding in sanctions compliance. They enable unambiguous identification of transacting parties, reducing false positives generated during name matching processes. Wider adoption of LEIs could enhance identity-based screening systems, making sanctions compliance faster, more effective, and less expensive. Including the LEI of sanctioned entities by Sanctions Authorities in their lists could reduce false positives and add transparency (Reference). Thus, LEIpapa recommends you to obtain an LEI for your company to show your contribution to the open and transparent corporate data, and avoid regulatory errors.
Power of the LEI When Applying Sanctions
- Sanctions authorities often lack detailed business registration IDs, tax IDs, or other identifying information, making it hard to validate targeted entities.
- Financial institutions face challenges in identifying impacted subsidiaries and securities that aren’t explicitly listed.
- Data vendors like Bloomberg or Nasdaq conduct extensive research to establish relationships between companies and financial instruments to understand sanctions scope.
- The LEI system offers a solution to these challenges by streamlining the identification process, making it less arduous and time-consuming.
Future of LEIpapa, as an LEI Registration Agent
The LEI opens the possibility to greatly streamline the entity identification process and allow for straight through processing. As a result, LEIpapa notices the value in sanctions authorities providing the LEI of sanctioned entities in their lists. The LEI is a unique and non-transferable validation point which would make the accurate identification of sanctioned entities faster, cheaper, simpler and more reliable.
The LEI also allows identify subsidiaries that are impacted as part of a corporate hierarchy as it contains the information on “Who owns whom”. And since the LEI dataset showcases the entity’s country of operation (legal presence and headquarters), it would also make it easier to tag entities in sanctioned countries and regions.
“By enhancing financial data quality and bringing more transparency and consistency to the capital markets, LEIs are an important piece of the puzzle when it comes to screening sanctions in an efficient, thorough manner.” - Steve Meizanis, Bloomberg.
For LEIpapa, the future likely involves leveraging LEI systems to streamline sanction compliance processes, reduce costs, and enhance efficiency and accuracy in identifying legal entities and their relationships. We build the most reliable and transparent platform that will allow market participants to store, maintain and update their corporate data on the same resource where the official data is stored.