What is Watchlist Screening and Why Is It Important

Compliance with Anti-Money Laundering (AML) regulations is critical to preventing financial crimes and curbing funding for illegal activities. Governments around the world are constantly working on strengthening these regulations and expanding the AML perimeter.

Given the differences in business structure and services, AML regulations may be adapted for each sector. That said, there are certain core AML principles shared across industries. Risk assessment with watchlist screening is one such aspect of these compliance programs.

What is Watchlist Screening?

Watchlist screening refers to comparing individual and organizational identities against sanctions watchlists and names of known domestic and international criminals. These digital databases are maintained by law enforcement agencies, international organizations, governments and other regulatory organizations.

They include names of suspected terrorists, known criminals, individuals on various sanctions lists and so on. In addition, businesses may also need to screen customers against databases of domestic and foreign Politically Exposed People and their relatives as well as individuals mentioned in adverse news reports.

These watchlists are accessible online directly from regulatory agency websites. Some of the watchlists used to screen potential clients are the:

• Interpol Most Wanted List
• Office of Foreign Assets Control (OFAC) Sanctions List
• Financial Action Task Force (FATF) High-Risk Jurisdictions List
• United Nations Security Council Sanctions List
• Specially Designated Nationals and Blocked Persons (SDN) List

Risk Assessment with Watchlist Screening

Watchlist screening is an activity that must be ideally performed when onboarding new customers as well as before making a new transaction for existing customers. The individual’s identity is screened against relevant watchlists.

Any names that have a full or partial match as compared to the database are highlighted and given a risk score. The risk score is also influenced by other factors such as the individual’s location and transaction history.

Depending on the risk assessment, compliance teams investigate further to ensure that the individual is the one named on the sanctions list and not a false positive. This keeps people who share their names with people on sanctions lists from being mistakenly blocked. Businesses can then choose to freeze transactions and flag activities linked to the individual with high-risk scores.

Understanding the Need for Watchlist Screening

Watchlist screening is an important part of assessing the risk a business is exposed to by being associated with an individual or organization. While banks and financial institutions are usually highlighted for AML compliance, money laundering is not necessarily limited to these industries.

According to the United Nations, up to 5% of the global GDP passes through the money laundering cycle each year. Hence, any business that processes financial transactions must screen customers against global watchlists. Some of the benefits of doing so include:

• Lowered risk of penalties

As global efforts to curb financial crime intensity, governments are cracking down on companies that do not comply with AML regulations. Failing to monitor transactions and ensure data accuracy in monitoring systems can make businesses liable for hefty fines. In 2020, the London branch of a German bank, Commerzbank, was fined $50 million for failing to comply with AML regulations. It is believed that their inadequacies led to over $250 billion being laundered out of Sudan, Myanmar and Iran.

• Improved public image

Not all businesses subject to such fines can pay them. A $23 billion fine levied on the Bank of Credit and Commerce International (BCCI) ultimately drove the company to declare bankruptcy. Even if the company has the resources to pay the fines, the loss of reputation is considerable. Business partners, investors, employees and potential clients will all think twice before dealing with the business. This is a loss that is hard to quantify and the effects can last for years.

• Minimized risk of unconsciously aiding fraudsters

Businesses that do not screen customers against watchlists unconsciously let criminals use their products and services to launder money. This makes them instrumental in criminal activities like money laundering. Such involvement leads to a loss of credibility and has a negative impact on business partners as well as customers.

Manual vs Automated Watchlist Screening

Watchlist screening may be a manual check or automated with AI-powered tools.

Relying on manual efforts requires immense attention to detail to avoid errors and can be quite slow. This can be problematic when dealing with large data volumes. That said, human reviewers can take cultural contexts, etc. into consideration to avoid false positives.

On the other hand, automated watchlist screening is much quicker and more scalable. AI-based tools can use Machine Learning algorithms to quickly screen large volumes of data and identify high-risk entities. It ensures consistency in the watchlist screening process and improves cost efficiency. Most importantly, it negates the risk of human error.

Choosing the Right Watchlist Screening Tool

Using automated solutions for watchlist screening rather than manual searches is not only quicker but also delivers more reliable results. With the right tool, businesses can enter a name in the search field and screen it against multiple watchlists in minutes. This smoothens the customer experience while ensuring AML compliance.

When you’re choosing a watchlist screening tool, here are a few points to keep in mind:

• Ensure that the tool must have access to the most up-to-date versions of databases that are relevant to your business.
• It must be capable of handling characters from different alphabets. For example, you may need to scan names in Chinese or Arabic.
• It must be able to identify spelling variations and nicknames.
• You should be able to tailor the search to your business rules and risk threshold.
• It should provide quick and reliable results.
• It should be easy to scale.

Summing it up

Proactively identifying the risk prospective customers pose to your business strengthens AML compliance, reduces the organization’s exposure to regulatory fines and protects your brand reputation. Though manual screening is possible, it is more efficient to leverage AI-powered solutions to automate this task.

With the right watchlist screening tool, you can automate end-to-end screening for customer onboarding and ongoing monitoring while delivering a seamless customer experience.