What, How & Why Sanction Checks in Cross-Border Payments

Sanction Checks & Reporting for Cross-Border Payments

Financial sanctions orders simply ban a business or an entity from doing business with a specific individual or organization (known as the target). In some cases, the order will restrict a company from providing financial services to the target.

These measures can range from the most comprehensive banning any funds from being transferred to a sanctioned country and freezing the assets of a government, corporate entities, and residents of the target country – to targeted asset freezes on individuals/entities.

An individual or an entity may face sanctions in several ways, including:  
  • The entity is directly named on a sanction list;
  • The entity is indirectly sanctioned through beneficial ownership/controller/shareholder; and
  • The individuals who are the directors or employees of the entities are named on a sanctions list. 

Failure to comply with a financial sanction is a criminal offence unless the institutions have an appropriate licence or authorization from the Office of Financial Sanctions Implementation (OFSI). The sanctioned entities, and individuals’ names are listed on the OFSI website as well as any other sanctions lists published by any other countries or jurisdictions. Their website provides information about current financial sanctions, including a comprehensive list of all those subject to asset freezes or sanctions under UK law.

These anti-money laundering sanctions lists, also known as watchlists, are an aggregation of several regulatory and enhanced due diligence lists from all major sanctioning bodies around the world, including global lists like OFAC (Office of Foreign Assets Control), UN sanctions, EU (European Union) sanctions, HM Treasury and PEP (Politically Exposed Persons), and in-country lists like OFAC, UN sanctions, EU sanctions, HM Treasury and PEP.

It is important to know the following facts about financial sanctions:
  • Government can impose financial sanctions on any individuals, entities, and other countries.
  • The Government that imposes financial sanctions will not be enforcing the sanctions law. OFSI oversees implementing, administering, and enforcing the financial sanctions regime.
  • Financial sanctions apply to all transactions; there is no monetary minimum.
  • Most listed individuals and entities are aware that they are on the OFSI’s publicly available Consolidated List of Politically Exposed Persons (PEPs). As a result, the issue of ‘tipping off’ (as defined in the Proceeds of Crime Act 2002) should not arise in most cases.
  • Clients are not screened against the OFSI’s Consolidated List in standard anti-money laundering checks. Companies should not mix up the government’s financial sanctions regime with anti-money laundering procedures.
  • These sanctions lists are not static; they change as regulations change and people’s status changes.

Sanctions Screening

Dealing with people on sanction lists can have serious ramifications. For any entities involving cross-border payments, it is vital to have an efficient system to perform financial sanction checks that ensures legal compliance and reduces the risk of fraud or illegal funds entering your payment process.

Beneficiary screening for payments is a control used by Financial Institutions (FIs) to identify, monitor, and prevent sanctions risks. Beneficiary screening is critical to ensuring that the financial institution does not do business with a sanctioned entity and remains compliant.

To achieve their goals, most FIs will use two main screening controls:
  • Transaction screening – Transaction screening is a technique for detecting transactions involving specific people or entities.
  • Customer screening – During onboarding or the lifecycle of the customer relationship with the FI, customer or name screening is used to identify targeted individuals or entities.

Transaction and customer screening are intended to work together to create a strong set of options for identifying sanctions targets. It should be recognised that the way these controls are managed has several limitations and that they should always be used as part of a larger Financial Crime Compliance programme.

It is always the best practice to frequently check:
  • Your existing clients against the OFSI Consolidated List
  • All new customers before providing any services or transactions
  • Are there any updates to the OFSI Consolidated List?
  • Any changes to your client’s details

It is the individual, entity, or government’s responsibility to ensure that they and their system can mitigate the risk of financial crime, including those that allow you to comply with financial sanctions obligations. These may need to differ from those in place for anti-money laundering purposes because compliance with sanctions requires you to consider who is receiving payments and whether funds are coming from a completely legitimate source.

To ensure that the business receives funds from a legitimate source, they should verify the sender’s identity, conduct due diligence, and often monitor the sanctions list.

If you are dealing with international clients or individuals, make sure they are not on any sanction lists, which are lists of people who have been or could be harmed by illegitimate funds. include politically exposed persons (PEPs), those entrusted with a high-profile public position, and their close associates’ families. These individuals are more likely to be involved in corruption and bribery because of their position of power and influence.

What is the difference between domestic and cross-border payments screening?

Transactions that take place entirely within the country are referred to as domestic payments. These are not subject to the same screening in medium and large FIs.  As both the originating and receiving FIs are in the same jurisdiction and are therefore bound by the same regulatory standards when onboarding clients.

Cross-border payments involve transactions between parties based in two or more countries. Correspondent banking is a process in which a foreign and domestic bank enter into an agreement and a correspondent account is created at one bank for the other. Correspondent banking entails the establishment of reciprocal accounts between the two banks, allowing the domestic bank to make payments or money transfers on behalf of the foreign bank, and allowing the foreign bank to handle international financial transactions for customers.

In terms of screening, the main difference is that cross-border payments are undoubtedly screened for risk and monitored with greater thoroughness. This is because many foreign businesses trade in US dollars and are therefore subject to the Office of Foreign Assets Control’s strict requirements and jurisdictional reach (OFAC). Because FIs must deal with cross-border regulatory requirements outside of their legal framework, these payments are more difficult to track. This problem is compounded in the international banking space, where correspondent banking is used in most cases which do not involve their customers in a substantial chunk of the payments, there is limited information available for the customers to figure out if the payment has a sanctions risk.

Non-Compliance Penalties and the consequences

Cross-border payments have been and always will continue to be highly regulated and secure. Each country in the transaction network will have its own legal and regulatory requirements, as well as its compliance and security protocols.

If any financial institutions find their payee or payers on a sanctions list, it should be reported to the regulators. Failure to do so leads to an increased risk of regulatory action, which can result in large fines and reputational damage, as we’ve seen recently with global banks. Before reporting to the regulator, alerts generated by sanctions screening must be probed further and potential sanctions risks assessed.

Institutions that do not comply may be subjected to long-term monitoring. Monitors are unbiased experts who examine a company’s culture, systems, and processes on the company’s dime before making recommendations and validating their implementation. These can result in a bank losing its licence to trade in certain currencies in the most severe cases, and they can last for years. Even after the monitorship has been lifted by a court, the bank can be audited at any time and must always follow the auditor’s instructions.

Handling compliance breach depletes resources and makes it difficult to recruit and keep top talent, putting payment providers at substantial risk of falling behind in terms of innovation.

Payment service providers and banking institutions, on the other hand, cannot afford to cut corners on customer service. Making quick decisions is critical because delaying legitimate payments can result in financial penalties and customer dissatisfaction.

Conclusion – Need for Technology to achieve compliance

As compliance plays a significant role in cross-border payments, it is vital to choose the best FinTech solutions for AML sanction checks that should go together with cross border payments platform. Screening is not just the matching of names; it involves various business logic and risk-based algorithm to derive the desired results to comply with the regulators.

Macro Global, the leader in RegTech as well as in FinTech solutions, built our NetRemit – Cross Border Payment Suite with automated eKYC validation integrated within the product. NetRemit also features AML & Sanctions check to offer seamless customer onboarding.

NetRemit’s Integrated Transaction Screening feature scrutinises the sender and recipient, preventing money laundering and financial crimes before the process cycle begins, saving banks a significant amount of money.

For compliance and business efficiency, MG’s NetRemit provides extensive reporting capabilities. It generates more than 30 analytical and management reports, such as Suspected Fraud Reports, Enhanced Due Diligence Reports, Compliance Reports, and Watchlist Reports, allowing stakeholders to always stay on top of the market.

NetRemit provides cross-border, real-time, and faster settlement solutions for B2B, B2C, and P2P services, allowing for immediate and prompt pay-outs into bank accounts and third-party wallets.

NetRemit is a complete end-to-end solution for managing, monitoring, and improving business processes, allowing companies to complete the process life cycle on a single platform.

Our upgraded global product features customised data analytics and business intelligence modules along with improvised notifications through AI & ML that serves the purpose of our client.  Please, visit our product page for more information.

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