Understanding Sanctions Screening for Financial Institutions

In today's globalized world, financial institutions play a vital role in facilitating international transactions. However, with the rise of illicit activities and the need to maintain global security, regulatory bodies have implemented sanctions against individuals, entities, and countries involved in illegal or harmful practices. To comply with these sanctions and prevent financial crime, financial institutions employ a crucial process known as sanctions screening.

What is Sanctions Screening?

Sanctions screening refers to the systematic process by which financial institutions screen their customers, transactions, and business relationships against government-issued sanctions lists or watchlists. These lists contain names of individuals, companies, organizations, or countries subject to various sanctions, such as asset freezes, trade restrictions, or travel bans. The objective of sanctions screening is to identify and prevent transactions involving sanctioned entities, thereby mitigating the risk of money laundering, terrorist financing, or other illicit activities.

The Importance of Sanctions Screening

Sanctions screening is a critical component of a financial institution's compliance framework for several reasons:

1. Legal Compliance: Financial institutions are legally obligated to comply with sanctions imposed by national and international regulatory bodies. Failure to adhere to these sanctions can result in severe penalties, reputational damage, and loss of business. By conducting thorough sanctions screening, financial institutions demonstrate their commitment to upholding legal requirements and maintaining the integrity of the global financial system.
2. Risk Mitigation: Engaging in transactions with sanctioned individuals, entities, or countries can expose financial institutions to significant risks. These risks include reputational damage, financial losses, and legal consequences. By implementing robust sanctions screening procedures, institutions can identify and mitigate potential risks, safeguarding their reputation and financial well-being.
3. Enhanced Security: Sanctions are imposed to counteract a wide range of threats, including terrorism, nuclear proliferation, human rights abuses, and organized crime. Through sanctions screening, financial institutions contribute to global security efforts by preventing the flow of funds to those engaged in illicit activities. By blocking transactions involving sanctioned entities, institutions help disrupt the financial networks that support harmful practices.

The Sanctions Screening Process:

The sanctions screening process typically involves the following steps:

1. Compilation of Sanctions Lists: Financial institutions gather and maintain up-to-date sanctions lists issued by various regulatory bodies, including governments, international organizations, and law enforcement agencies (UN, OFAC, EU, UAE Local List, FIU). These lists often contain thousands of names and entities associated with sanctioned activities.
2. Customer and Transaction Screening: Financial institutions screen their customers, counterparties, and transactions against the compiled sanctions lists. This screening is conducted during customer onboarding, ongoing monitoring, and before processing transactions. Automated screening systems use advanced technologies, including artificial intelligence and machine learning, to efficiently analyze vast amounts of data and flag potential matches.
3. Investigation and Reporting: When a potential match or "hit" is identified, financial institutions have to undertake a comprehensive investigation to determine whether the match is a true positive or a false positive. False positives can occur due to similarities in names or data inaccuracies. If a true positive is confirmed, the institution must report the match to the appropriate regulatory authorities and take necessary action, such as blocking the transaction or freezing assets.
4. Continuous Monitoring and Updating: Sanctions lists are regularly updated as new sanctions are imposed or lifted. Financial institutions must stay vigilant and ensure that their sanctions screening systems are continuously updated to reflect these changes. Ongoing monitoring of customers and transactions is crucial to detect any changes in risk profiles and to identify new sanctions-related risks.

Checking against sanctions lists in UAE 2023

Senior management should know the FI’s obligations regarding sanctions imposed on persons designated as terrorists or involved in terrorist financing. The compliance officer is responsible for ensuring that customers are screened against lists of persons designated as terrorists or involved in the financing of terrorism and that, where potential matches are identified, appropriate actions are implemented which include further investigations and upon match or identification of red flags, filing of an STR immediately. To ensure that the FI is not used by terrorists or those seeking to finance terrorism, the FI must check the lists issued through United Nations Security Council resolutions and information from the financial intelligence unit or the supervisory authority. If the FI fails to monitor these notices and checks customers against these lists, it runs the risk of breaching international sanctions legislation.

Legal Obligations of financial institutions and DNFBPs in UAE (Sanctions 2023)

Article 21 Cabinet Decision No. (20) of 2019

1. Register on the Office’s website in order to receive notifications related to new listing, re-listing, updating, or de-listing decisions issued by the UN Security Council, the Sanctions Committee, or the Cabinet.
2. Regularly screen their databases and transactions against names on lists issued by the UN Security Council, the Sanctions Committee, or the Local Lists, and also immediately when notified of any changes to any of such lists, provided that such screening includes the following:
• Searching their customer databases.
• Searching for the names of parties to any transactions.
• Searching for the names of potential customers.
• Searching for the names of beneficial owners.
• Searching for names of persons and organizations with which they have a direct or indirect relationship.
3. Continuously search their customer database before conducting any transaction or entering into a serious business relationship with any person to ensure that their name is not listed on the Sanctions List or Local Lists.
4. Implement freezing measures, without delay and without prior notice to the Listed Person, immediately when a match is found through the screening process referred to in paragraph (2) of this article.
5. Implement decisions to lift freezing measures without delay, pursuant to Relevant UNSCRs or decisions of the Cabinet regarding the issuance of Local Lists.
6. Immediately notify the Supervisory Authority in the following cases:
• Identification of funds and actions that have been taken as per requirements of Relevant UNSCRs or decisions of the Cabinet regarding the issuance of Local Lists, including attempted transactions.
• Detection of any match with listed persons or entities, details of the match data and actions that have been taken as per the requirements of Relevant UNSCRs and Local Lists, including attempted transactions.
• If it is found that one of its previous customers or any occasional customer it dealt with is listed on the Sanctions List or Local Lists.
• If it is suspected that one of its current or former customers or a person it has a business relationship with is listed or has a direct or indirect relationship