Why Is the Sanction Checklist a Must-Do Protocol for AML Compliance?

What Is a Sanction Checklist? How does the Sanction checklist help in regulatory compliance? Why should financial firms perform sanction screening before onboarding new customers? To understand these questions, let’s first understand why the global regulatory organizations have mandated compliance protocols like Sanction screening for the financial institutions like banks, investment firms, insurance companies, brokerage firms, mortgage firms and savings & loans institutions and others. 

Why Sanction Screening Is Mandated By Regulatory Bodies?

The global anti-money laundering watchdog FATF, has devised financial regulations for the financial firms to comply with. Sanction screening is one of the non-negotiable compliance protocols that benefits the firm as well as the international financial system. 

 

With the dawn of technological advancement and globalization, the scale and the extent of financial crimes have risen to astounding levels. Financial crimes such as misappropriation or embezzlement of state funds, tax evasion, foreign or use of credit of settlement card, production, sale or use of false excise stamps, money laundering, identity theft, and beyond.

 

According to the Thomson Reuters, following is breakdown of financial crimes accounts in the globe today

 

  • 20% of the financial frauds
  • 20% cybercrimes
  • 19% theft
  • 16% bribery and corruption
  • 14% money laundering
  • 4% slave labor or human trafficking

 

Nearly half of the firms become victims of financial crimes like corporate fraud, theft and end up paying the consequences for the crimes of their clients. 

Why Do Governments Impose Sanctions?

Governments around the world use sanctions as a modern foreign policy instrument to influence the behavior of targeted individuals, organizations and sometimes even an entire country. Anyone including an individual, group or a state that threatens the national security of a country or breaks international law by starting an unprovoked war are subject to sanctions by the developed countries like the United States, United Kingdom, Switzerland, Australia, Canada and others. Countries that have immense economic power usually possess the power to impose sanction on their target entity. 

 

Once the sanctions are imposed its implications include travel ban, asset seizure in foreign countries, termination of diplomatic ties, trade and export embargo, and prohibition of using the international financial system. 

 

After the invasion of Ukraine, Russia has become one of the sanctioned countries in the world followed by Iran in second place, North Korea in third place. This implies that individuals or organizations from these countries are prohibited to travel in the western countries, use the global financial system, do business in the western countries, and their governments have no formal ties. 

What is the Relationship Between Financial Businesses and Sanctions?

Sanctions are imposed for a number of legitimate reasons and the decision to impose sanction on an individual, organization or a state is usually decided by the legislative bodies by following democratic processes. Therefore, nobody can essentially question these sanctions. Firms and institutions are obligated to comply with sanctions or else, face the music. 

 

Since financial firms stand at the forefront of financial crimes, therefore, they have a significant role to play when it comes to the effective implementation of sanction. Sanctioned individuals or groups could be involved in money laundering or terrorist financing. Therefore, ignoring these sanctions means allowing the criminals to use international financial systems to move their ill-gained money around, fund their criminal activities and get away with them. 

What Is a Sanction Checklist?

You may ask what a Sanction Checklist really is? Government organizations around the world, and international regulatory institutions release sanctions checklists to help the financial institutions in their efforts to comply with anti-money laundering regulations. Given the changing geopolitical dynamics, these sanction lists are updated regularly for the financial institutions to perform sanction list screening

 

What Is the Procedure for Sanction Screening?

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. 

 

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. 

How Financial Firms Can Take Advantage of Sanctions Screening Services?

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 growing ever-increasing and complex compliance landscape, there are a number of sanctions screening services readily available in the regtech markets all around the world. 

 

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