Watchlists Screening – Step-by-Step Guide in Transaction Monitoring

Why Should Financial Firms Invest in Watchlist Screening Tools?

Since financial firms are more prone to scammers and fraudsters, therefore, all financial institutions must invest in employing comprehensive Anti-Money Laundering compliance tools such as watchlist screening systems. Using compliance tools will enhance their financial standing and build a reliable customer base. Financial firms can stay away from entities and organizations that may be engaged in financial crimes such as money laundering, and terrorist financing by taking advantage of regulatory technologies like watchlist screening tools by identifying and verifying customers. Given the complex regulatory landscape, sanctions & watchlist programs are extensively used by various financial firms and state agencies to screen their clients or suspicious individuals and entities using a comprehensive database comprising names and their background information, also termed as ‘watchlist’.

Understanding the Watchlist Screening

Global Watchlist screening has a database containing names and profiles of persons as well as organizations that might be engaged in financial crimes such as money laundering, corporate frauds, terrorist financing and beyond. It also contains comprehensive lists of people with adverse media and Politically Exposed Persons (PEP) lists from high-risk industries and high-risk countries. Its purpose is to disrupt the financial transactions of such criminal entities that present serious threats to the international peace, regulatory compliance and integrity of the global financial system. 

Governments agencies across the globe and international regulatory authorities come together to collaborate and cooperate in drafting a global watchlist to keep financial crimes at bay. This helps businesses in the financial sector to have a risk based approach and check the names of their potential clients in the retribution records to make sure they are not listed in them.  If, somehow, a potential client comes off in the blacklist, he will be regarded as a high-risk customer for his involvement in criminal activities such as corruption, bribery, embezzlement of government funds, smuggling of weapons, drugs and so on or for having links to prohibited groups like some terrorist organizations.  

Sources Of Watchlist 

All financial firms are mandated to employ an Anti Money Laundering compliance system including Watchlist Screening Service to compile comprehensive data from various credible sources. These credible sources includes:

• Sanction lists against various entities and organizations by various government agencies including OFAC Consolidated Sanctions List, OFAC Specially Designated Nationals (SDN) List, European Union financial sanction list, SECO sanction list, DFAT Consolidated sanction list, HMT Financial sanctions list, United Nations sanctions list and other
• The Denied Persons List (DPL) issued by the United States.
• Comprehensive PEP lists issued by various government agencies, regulatory authorities and private enterprises. 
• Databases maintained by intergovernmental organizations and state-specific agencies such as Interpol, Europol. 
• Greylists and blacklist provided by Financial Action Task Force (FATF) comprising records of infamous money launderers and Non-Cooperative Countries & Territories (NCCT).
• Intelligence shared by Financial Market Supervisory Authority (FINMA) and U.S. Securities and Exchange Commission (SEC)

Step 1: Run Data Screening Against Credible Watchlist Tool

There are various AML watchlist screening Solutions currently available in the Regtech markets. Choosing the right one is the key. Your choice of watchlist screening tool should align with your business interests and the databases it offers should be relevant to your firm. Generally, public watchists databases comprise the UN sanctions list along with the EU sanction list and OFAC. Whereas private databases could comprise third party data or their own internal database. 

Step:2 Examine the Results

After screening against the watchlist database, the next step is to examine the generated results. The potential results could be false positives or false negatives. A compliance officer must examine the results manually. Both false positives and false negatives have potential negative consequences. For instance, false positives generated after watchlist screening results in further inspection by the compliance officers whereas false negatives could have dire consequences of missed risks. 

Step 3: Conduct An Investigation Into Potential Matches

Examine the potential matches to mitigate potential risks. Employing supplementary resources like open-source intelligence, enhanced due diligence protocols and human intelligence can accelerate the accuracy of generated results and help process it faster. 

Step 4: Take Necessary Action

Take appropriate and necessary measures depending on the results of the investigation. Make sure to follow reporting protocols if necessary and be vigilant to follow all compliance protocols appropriately to act in accordance with all regulations. This can help mitigate the potential dangers of missing any risky false negative. 

Watchlist screening can be done manually as well as by employing automatic tools. However, doing it manually gets challenging since it increases the chances of human error and takes a hell lot of time. Therefore, firms today must opt for automated AML Watchlist solutions. Investing in compliance tools is better than paying hefty fines later.