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ARTICLE
Watchlist Screening - Customer Due Diligence 101
How well do you really know your clients? For banks and financial institutions, this is not just important—it’s essential. Luckily, watchlist screening offers a reliable way to gather the critical insights needed to ensure compliance by identifying risks early and build trust.
By cross-checking individuals or entities against official sanctions lists, databases from international organisations, or trusted third-party sources, potential threats can be uncovered before they become a problem.
Watchlist screening is therefore an essential part of Customer Due Diligence, as it allows banks and other financial institutions to properly calculate risk and stay compliant with Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) regulations.
In this article, we will discuss watchlist screening in more detail, examining the different checks that fall under this umbrella and seeing how this process makes up a significant cornerstone of AML and CFT frameworks.
What is watchlist screening?
Both Know Your Customer (KYC) and Know Your Business (KYB) dictate that a bank or other financial institution must identify and verify their clients during onboarding as well as throughout their client lifecycle. This is so that they can have ample insight into who they’re doing business with and determine whether the person or entity in question is at a high risk of committing money laundering, financing terrorism, fraud, or other similar financial crimes.
Watchlist screening makes up an important step in this process as it provides the regulating body information that wouldn’t be immediately available on their ID. For example, whether they are a Politically Exposed Person or have been accused of laundering money in the past.
Watchlist screening is comprised out of the following checks:
• PEP screening
• Sanctions screening
• Adverse media screening
• Known criminal or people or interest lists
Let’s discuss these processes in more detail.
PEP screening
In order to combat financial crime such as money laundering, fraud, and bribery, individuals who have in the past or currently hold a public position of power and/or have access to public funds must be identified and monitored.
This is because said individuals will generally pose a higher risk to banks and other financial institutions. Furthermore, even individuals who are related to or have close business ties to PEPs need to be flagged as Relatives and Close Associates (RCAs) during a PEP screening.
The PEP check itself is performed via public registers for a given country or city. For example in the UK, seeing whether a client’s name shows up on the list of parliament members or, on a local level, on a list of council members in London. But as with most watchlist screening processes, multiple different sources covering different jurisdictions will be used.
PEP checks can also be performed manually, for example by searching someone’s name online as public figures are often covered in media outlets, or by relying on third-party lists that consolidate all relevant PEP data into one database.
Sanctions screening
The purpose of sanctions screening is to determine whether the person or entity in question is under sanctions from any regulating bodies, organisations or governments. Sanctions lists could affect countries that the FATF has deemed as a high risk, organisations, or specific people.
Staying in the UK, the bank would look through the UK sanctions list. However, sanctions screening will typically involve going through multiple different government lists, to ensure compliance across jurisdictions.
This makes it easier for banks that span multiple jurisdictions to stay compliant, as sanctions lists aren’t uniform but rather can differ from one country/organisation to the next. With both PEP and sanction checks, financial institutions can also utilise third-party lists that centralise all of the relevant data to streamline the process.
Adverse media screening
Adverse media screening is performed to see whether the client in question has received any negative and/or notable coverage. For example, if a person has been named as a suspected criminal or a legal entity has recently laid off a large portion of its staff inexplicably.
Unlike the previous two screening methods, adverse media screening isn’t as standardised. In fact, depending on the jurisdiction, it may not even be enforced. However, adverse media screening is still seen as part of AML/CFT best practices and is recommended by the Financial Action Task Force (FATF).
This is because it’s a very good supplementary screening. For example, a PEP might turn out as a false negative during the PEP check but during the adverse media screening, news of their new position might show up. Additionally, adverse media screening can provide valuable data that wouldn’t be present in the other processes; like recent public accusations or their plans to acquire a business.
The process itself is typically done through trusted news publications, local and national outlets, relevant blogs, and social media. Larger, more advanced banks will typically use automation or some form of AI to quickly go through these different sources and flag anything that meets certain criteria.
However, smaller banks might just Google the person’s name, as getting access to all of these different sources of information can be a challenge.
Known criminal or people of interest lists
Lastly, under this category we’re going to count the many different lists that contain information about wanted criminals, fugitives, or people of interest. For example, Interpol’s Red Notice list or FBI’s Most Wanted.
These lists are the most direct way for banks and other financial institutions to avoid working with known criminals.
Why is watchlist screening important for Customer Due Diligence compliance?
The reason watchlist screening is important for Customer Due Diligence compliance is because it influences how a certain person or entity will be processed. For example, if a person is identified as a PEP, Due Diligence compliance necessitates that they go through Enhanced Due Diligence.
After all, as a person in the public sector, they have more influence and often funds than the average person. Therefore, they present a larger amount of risk and need to be more closely monitored.
In more extreme cases, certain clients should be barred from making transactions altogether. For example, an individual whose funds have been frozen due to sanctions.
Lastly, there’s also the matter of reputational damage. Imagine your bank is approached by a business that has recently been accused of laundering money. You must consider whether the potential reputational damage is worth their business.
Challenges when performing watchlist screening
While watchlist screening is relatively simple at first glance, there are notable challenges. The most obvious and important one being how much information needs to be processed. Since all of the aforementioned checks typically rely on multiple different lists, banks performing watchlist screening manually can quickly get backed up.
Furthermore, these lists aren’t set in stone. Namely, PEP, sanctions, and people of interest lists need to be updated regularly. Failing to do so can put the bank or financial institution in question at risk of non-compliance.
Lastly, even if automated CDD software is used, some issues may arise. Namely, unless the software utilises AI, it can struggle to consistently name match clients and entries. For example, if the person’s name has 2 accepted spellings, they use an alias or have changed their name recently.
Furthermore, data lists don’t always contain all of the necessary information needed to verify a person. For instance, if an adverse media check includes a first and last name but not a date of birth or a picture, the match can’t be verified. And all of this can lead to false positives and false negatives.
False positives and false negatives
Both false positives, incorrectly identifying someone as a match, and false negatives, failing to identify a true match, are a major case for concern for banks. Of the former, false positives can severely slow down processing as more clients would have to go through Enhanced Due Diligence than necessary. This is typically caused by the commonality of names, a lack of identifiable data, and matching criteria that is too wide.
False negatives on the other hand may put the bank in question in danger of non-compliance, as it can implicate them with threat actors. This typically occurs due to a lack of identifiable data and/or not using enough different data sources.
However, fully doing away with either is impossible currently. This is because in case that the process is processed manually, human error will always be a factor. And due to differences in data quality as well as external factors, even CDD software can wrongly classify clients.
This is why more modern software utilises machine learning that can pick up on patterns and go through an enormous amount of data to identify high-risk clients.
Conclusion
In conclusion, watchlist screening constitutes a series of different background checks that flag clients who are a PEP, under sanctions, have been subjected to negative media coverage, or are suspected/wanted criminals.
This is done so that banks and other financial institutions may more accurately assess risk and help prevent financial crimes such as money laundering, financing of terrorism, fraud, etc.
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worldwide trust Atfinity to drive their digital transformation.
Book your demo today and see why leading financial institutions worldwide trust Atfinity to drive their digital transformation.