How Sanction Screening System Protects Firms From Criminal Clients

In order to prevent the financing of the proliferation of weapons of mass destruction and financial crimes like money laundering and terrorist financing, which damages the reliability and integrity of international financial system as well as government institutions, the Financial Action Task Force (FATF), a global anti-money laundering watchdog, has directed the firms operating in the financial landscape (since this particular industry is more prone to facilitating financial crimes by allowing the fund transaction) to follow a set of regulatory guidelines or face legal penalties. 

Sanctions list screening helps firms make informed decisions when onboarding new customers. Investing in compliance protocols like sanction screening helps firms themselves to avoid conducting business with clients that may be engaged in illicit activities and save themselves from damaging consequences..

Why Does Sanction Screening Matter So Much?

In the world of business, the ethical conduct of your business partners, customers or investors tend to have far-reaching implications for the success of your business. Compliance measures such as sanction screening helps identify criminal activities such as identity theft, insider trading, money laundering, bribery, corruption, terrorist financing, and beyond. 

A financial firm simply cannot afford to ignore the international as well as regional sanctions and it can not simply continue conducting business with individuals, organizations or clients belonging to sanctioned nations. Providing financial services to a client that is sanctioned by the international organizations (such as United Nations, or individual countries such as the United States, United Kingdom, Australia, Switzerland, Turkey, Canada and beyond) usually results in astronomical fines, costly lawsuits by the international regulatory bodies, law enforcement agencies, and governments institutions. 

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What Exactly Are the Sanctions?

Sanctions are used as a state’s foreign policy instrument which is devised by the government authorities in line with their foreign policy agendas. The primary objective of imposing a sanction is to influence the negative behavior of a group (for example: Al-Qaeda, Taliban, Hamas and others), an individual (for example: Russian president Viladimir Putin, North Korean dictator Kim Jong-Un) or an entire nations (as in the case of Iran, Cuba, Myanmar, Russia, Venezuela, Belarus, Syria and North Korea). 

Currently, Russia stands as the most sanctioned country in the world due to its invasion of Ukraine that started an unprovoked war. Iran comes in second followed by Syria in the third and North Korea in the fourth as the most sanctioned countries in the world. This implies that the firms operating in the financial world are restricted to conduct business with clients (individuals, organizations, brands etc) holding citizenship from any of the sanctioned nations. 

What Effects Do Sanctions Have in the Financial World?

Termination of diplomatic sanctions results in economic sanctions. Economic sanctions usually lead to asset freezing, travel ban, trade restrictions, and export restrictions. As for the financial world, the major implication is the expulsion from the international financial system which results in international banks being prohibited to provide financial services to the individuals, organizations or businesses belonging to a sanctioned nation or group. 

How Does the Sanction Screening Process Work?

Sanction screening process comprises screening your prospective customers against the sanctions lists released by the international regulatory bodies, and governments institutions. It is to make sure that before starting any business relationship, the potential customer is not sanctioned by any of the government’s institutions and international organizations, such as the United Nations. 

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Sanction screening is not just mandated for the financial industry alone, firms operating in the world of healthcare are also mandated to follow the compliance regulatory guidelines and conduct sanction screening before providing their services. Following the regulatory guidelines is a win-win situation for both the business and for the global financial ecosystem.

Given the changing geopolitical landscape and rising scale of money laundering and terrorist financing, the nature and implementation of sanctions has become quite complex. Since, the traditionals warfare has damaging consequences for all parties involved, governments and major superpowers now rely on sanction as their foreign policy instrument to prohibit and punish the individuals, organizations or nations that threaten their national security and break international laws. 

Therefore, their sanction list is continually growing, and changing all the time. Last five years has seen an astonishing increase in the sanctioned entities. Financial institutions, therefore, must invest in good sanctions screening services to mitigate the risk of regulatory fines by the government organizations and avoid getting embroiled in the financial scandals of their clients. 

Consequences of Non-Compliance with Sanction Screening Requirements

Financial firms including banking (commercial banks,  mutual savings banks, savings & loans associations, credit unions, specialized banks and microfinance banks) and non-banking institutions (insurance firms, currency exchanges, venture capitalists, and some micro-loan organizations) are all required by the international regulatory bodies like Financial Action Task Force (FATF), government organizations, and law enforcement agencies from all over the world to abide by the financial regulatory guidelines and are mandated to conduct sanctions screening checks before initiating any business relationship with a foreign individual, brand or organization. Failure to comply with sanction screening requirements will result in massive regulatory fines, reputation damages and in some cases, insolvency for the financial firms.