AML Screening FAQs
- FinScan
- Aug 2, 2024
- 8 min read
Updated: Jun 6
Anti-money laundering (AML) screening is essential for organizations looking to detect financial crime, comply with regulations, and protect their operations from reputational and legal risk. With increasing regulatory scrutiny and evolving sanctions regimes, understanding how AML screening works—and how to apply it effectively—is more important than ever.
This FAQ breaks down the key concepts, types, and tools involved in AML screening and monitoring. Whether you’re building a program or refining an existing one, these answers can help you strengthen compliance and stay ahead of emerging risks.
What is AML screening?
Anti-money laundering (AML) screening is the process of cross-checking customers against sanctions lists, watchlists, politically exposed person (PEP) lists, and adverse media. A strong AML screening process helps compliance teams identify customers, beneficial owners, and transactions that may pose a risk of financial crimes.
It’s crucial to note that AML screening alone does not fulfill all the AML obligations regulators require. A comprehensive AML program should also encompass customer identification and validation, customer due diligence, ongoing AML risk assessment, and high-quality data and technology.
Why is AML screening important?
Unfortunately, financial crime is everywhere. The United Nations Office on Drugs and Crime (UNODC) estimates money laundering represents 2-5% of global GDP every year. Any business is susceptible to being used to launder money from illicit sources. Banking, financial services, insurance, real estate, healthcare, gaming, gambling, and non-profit organizations are particularly exposed due to the far-reaching nature of their operations and the potential for large financial transactions.
Governments worldwide have responded by implementing stringent AML screening and economic sanctions laws and regulations, such as the Bank Secrecy Act and the USA PATRIOT Act in the US and the EU Anti-Money Laundering Directives (AMLD), to ensure businesses actively combat financial crime.
Moreover, upholding the highest standards of compliance ensures legal adherence for an organization while establishing a solid foundation of trust with stakeholders and fostering a reputation of integrity and responsibility.
Types of AML screening
There are four primary types of sanctions screening under the broader umbrella of AML watchlist screening: sanctions screening, watchlist screening, PEP screening, and adverse media screening. Each type addresses specific risk areas and employs distinct configurations in ensuring compliance with regulatory standards. Other types of screening include payment screening to stop risky transactions, and securities screening to uncover risks hidden in trading books and securities inventories.
Sanctions screening
Sanctions screening cross-references customer data against government-issued sanctions lists like those provided by the Office of Foreign Assets Control (OFAC) or the United Nations Security Council. These lists contain names associated with individuals, organizations, or countries subject to economic or trade sanctions. Sanctions screening AML is necessary to comply with the various international and national regulations and prevent financial institutions and organizations from inadvertently engaging in business relationships that violate sanctions regimes.
Watchlist screening
AML user screening, or watchlist screening, involves cross-referencing verified customer identities against lists compiled by various entities (such as government agencies, law enforcement, and financial institutions) to monitor individuals or entities suspected in illicit activities. Being on a watch list does not necessarily mean the person or entity has been proven guilty; it signifies the need for increased scrutiny during the customer due diligence process.
Watchlists can vary significantly in size, ranging from localized watchlists maintained by specific jurisdictions to global databases with millions of names. Examples include the FBI’s Most Wanted List or a financial institution’s own internal watch list. Due to the dynamic nature of risks, continuous monitoring of changes in customer data and real-time screening are imperative. This ensures any newly identified risks are promptly addressed, minimizing the potential for financial crimes to occur.
By conducting thorough watchlist screening, financial institutions can ensure potential high-risk customers or transactions are identified and managed. This not only helps mitigate risks but also demonstrates a commitment to regulatory compliance.
PEP screening
PEP screening is a specialized form of due diligence designed to identify individuals who hold prominent public positions and their relatives and close associates. These individuals present a higher risk for financial crime due to their influence and access to public funds. Identifying PEPs enables financial institutions to apply enhanced due diligence measures and assess the potential risks associated with a particular customer relationship.
PEP lists are compiled by various sources, including government agencies, international organizations, and commercial data aggregators. They contain names and affiliations of individuals holding political positions or with ties to influential figures. PEP lists can range from a few hundred to thousands of entries, depending on the scope of organization’s screening program and the region(s) they cover.
Real-time screening during onboarding and continuous monitoring is crucial to effective PEP compliance. Regular updates to PEP lists ensure that any changes in political status or affiliations are promptly identified and appropriate due diligence is conducted.
Adverse media screening
Adverse media screening proactively detects negative news or information about customers or prospects, which may indicate involvement in illicit activities such as corruption, fraud, or money laundering. It complements other types of AML screening services by focusing on media sources.
Adverse media screening doesn’t rely on predefined lists. Instead, data aggregators scour a wide range of media sources, including news articles, reports, and publications, for potentially negative information.
Continuous monitoring is essential in adverse media screening. Real-time algorithms and periodic reviews of media sources help identify emerging risks associated with customers or transactions.
While adverse media screening is not a mandatory part of the KYC process, it assists in identifying hidden risks, providing insights that aid in assessing customer risk profiles.
Payment screening
Payment screening is the process of reviewing financial transactions to detect potential risks and ensure compliance with AML and sanctions regulations. This involves checking key transaction details against global watchlists and regulatory databases to identify and block payments involving sanctioned individuals, entities, or jurisdictions before funds are transferred, helping to prevent financial crimes and maintain the integrity of payment systems.
As global regulations evolve and enforcement becomes more stringent, effective payment screening must operate in real time and adapt across multiple jurisdictions. This includes monitoring for PEPs, dual-use goods, and emerging sanctions updates that could impact both domestic and international payments.
Securities screening
Securities screening identifies potential sanctions risks hidden within a firm’s investment holdings, trading activity, or securities inventory. As regulatory scrutiny of investment strategies grows, risk and compliance teams must go beyond standard watchlist checks. This involves analyzing a wide range of financial instruments, including equities, structured products, and derivatives, to identify links to restricted entities, beneficial owners, and affiliated subsidiaries across multiple jurisdictions.
Effective securities screening relies on high-quality data and the ability to uncover complex ownership and jurisdictional relationships. It enables firms to detect hidden connections between securities and sanctioned parties and track exposure across portfolios.
Real-time screening vs. ongoing monitoring
Real-time screening cross-references customer names or transactions against AML lists as the activity occurs. It is typically used during customer onboarding for a swift and seamless experience. Moreover, it is used for transaction screening to ensure payments are processed in real time. Ongoing monitoring regularly checks customers against sanctions, PEP lists, watchlists, and adverse mediato track shifts in customer risk levels.
Why build an AML screening process?
Regulatory compliance
An effective AML screening process ensures compliance with legal obligations and regulatory standards, demonstrates consistent execution of policies and procedures in combatting financial crime, and facilitates a comprehensive audit trail for regulators.
Consistency
Robust AML screening instills uniformity in the treatment of customers and transactions to prevent oversights, ensure no elements are missed, and address high-risk cases through rigorous checks and standardized procedures.
Operational efficiency
A well-defined AML screening process reduces the operational and administrative burden on compliance teams by empowering them to focus on higher risk customers and transactions.
AML screening process
The AML screening process should consist of several key stages:
Data and list collection
Begin by aggregating comprehensive customer and transaction data, juxtaposed with curated screening lists comprising sanctions, PEPs, watchlists, and adverse media.
Data preparation for enhanced accuracy
Conduct a thorough data quality assessment to bolster the efficacy and precision of your AML screening tools. This identifies and rectifies any discrepancies, inconsistencies, or inaccuracies within the customer, transaction, and list data.
Screening algorithm configuration
Fine-tune your tool’s screening algorithm to pinpoint matches including name, gender, date of birth, and country, based on insights gained during the data preparation phase. Align the algo’s fuzziness with your organization’s risk appetite.
Alert generation
Establish your matching threshold for alerts using a risk-based approach considering factors like list type, data quality, and overall risk tolerance.
Alert resolution
Analysts review alerts to determine the appropriate course of action. They may clear the alert, escalate suspicions of a potential match, or confirm it as a valid hit.
Ongoing monitoring
Regularly screen your entire customer database again new and revised watchlists, sanction, PEP, adverse media list entries. Simultaneously, screen any new or updated customer records against all relevant AML lists to identify any emerging risks.
How can you improve your AML screening process?
Constantly striving for improvements in your AML screening and monitoring process will enable you to reduce risk and enhance operational efficiency. Explore this comprehensive set of measures to elevate your AML screening process:
Data quality assessment
Ensure your customer and transaction data is of the highest quality to improve the accuracy of your AML screening outcomes, such as reducing false positives or negatives and exposing your organization to unnecessary risks.
Advanced screening technology
Leverage cutting-edge screening tools to enhance the accuracy and efficiency of your AML program. Choose a solution that handles large volumes of data, identifies complex patterns, and reduces the likelihood of overlooking sanctioned or high-risk customers.
Fine-tuned screening configuration
Regularly test and fine-tune your screening configuration to improve screening results. Leverage insights gained from the data quality assessment to select the most pertinent fields. Evaluate and adjust the level of fuzziness to achieve optimal results.
Training
Train your team to discern red flags, conduct more accurate case reviews, and utilize screening technology proficiently.
Develop comprehensive training programs encompassing AML procedures, adept alert review, and effective investigation techniques. Provide ongoing training to ensure staff remains abreast of evolving risks and compliance imperatives.
Data governance and oversight
Implement robust monitoring mechanisms to track the loading of customer, transaction, and list data to you are consistently operating with the most current and reliable data, minimizing the potential for operational disruptions.
Signs that your AML program may need refinement
Creating ambiguous frameworks and guidelines
It’s imperative to establish clear and unequivocal guidelines for each step in the AML screening process to ensure consistency and effectiveness of your compliance efforts. Ensure every team member understands their role and responsibilities to maintain a uniform and reliable screening procedure.
Not documenting your process
Failing to meticulously document each step of your screening process can hinder accountability, impede audits, and potentially result in regulatory penalties. Maintain detailed records, including rationale for decisions made, to demonstrate due diligence in your compliance efforts.
Forgetting AML processes are a work in progress
As AML regulations and financial crimes evolve, an AML screening process must keep up. Your sanctions screening AML framework is a dynamic endeavor, necessitating regular reviews and updates. Stay on top of emerging threats, regulatory changes, and industry best practices and adapt your screening process accordingly.
FAQ
What is the purpose of AML screening?
AML screening helps identify individuals or entities listed in various AML watchlists and sanctions databases. Each list corresponds to a specific type of financial crime risk, thereby guiding the appropriate due diligence procedures required to mitigate the identified risk.
Who should perform AML screening?
AML user screening is an essential process for all organizations operating under AML and sanctions regulations. It is an integral part of customer due diligence, serving as a crucial procedure to detect and mitigate the risks associated with financial crime.
What are the possible consequences of not conducting AML screening?
Non-compliance with laws governing sanctions, anti-money laundering (AML), and combating terrorist financing (CFT) can lead to severe consequences. These may encompass substantial monetary fines, legal proceedings, tarnished reputations, and even official sanctions.
What is a false positive in AML screening?
A false positive is an alert generated by an AML screening tool, initially presumed to match an AML list record. However, upon thorough investigation, it is determined not to be a genuine match. This occurrence is typically attributed to factors like poor data quality, the utilization of imprecise screening algorithms, or overly loose screening configurations.
