Risks of Unaddressed Matches in Sanctions Screening

Risks of Unaddressed Matches in Sanctions Screening

It is essential for regulated entities to undertake effective AML measures to counter the risks of money laundering, terrorist financing, and proliferation financing (ML/FT and PF). As part of these measures, regulated entities need to conduct a sanction screening process.

Sanction screening is the process that helps regulated entities to check individuals, entities, and transactions against domestic as well as international sanction lists. Furthermore, this process is crucial for regulated entities to ensure compliance with regulations and avoid financial loss and reputational damage.

However, if they do not perform the effective sanction screening process, the chances of unaddressed matches increase, which poses many risks that can significantly impact businesses.

The following is the list of risks that regulated entities face due to unaddressed matches in sanctions screening:

1. False Positives

Sanctions screening software often provides false positives. One needs to investigate the results and disambiguate matches. The idea is to separate false positives from true positives and then take appropriate actions on true positives like filing Funds Freeze Report.

If false positives remain unaddressed, one might end up filing FFRs for wrong results. If one overlooks them then it can result into regulatory fines and penalties.

2. False Negatives

False negative, on the other hand, means slipping on a sanctioned entity through the screening process. This leaves red flags undetected, which exposes regulated entities to potential regulatory violations and reputational damage. The direct impact of unaddressed false negatives is that one will end up establishing a business relationship with a criminal.

False negatives are more dangerous than false positives. The false positives only increases the compliance burden but false negatives leave one exposed to sanctions violations having serious impact on the business.

3. Compliance Risks

When a regulated entity fails to address any matches during sanctions screening processes, it opens the risks of non-compliance with regulatory requirements. As a consequence, the regulated entity is exposed to legal consequences, including penalties, fines and regulatory scrutiny.

4. Reputation Risk

For any business to be successful and retain its position in the market, it is essential to maintain its reputation in the eyes of the general public and regulatory authorities. As unaddressed matches in sanctions screening lead to non-compliance and increase the chances of working with criminals, it is detrimental to the reputation, growth, and continuity of the business.

5. Financial Crime

The sanction screening process helps regulated entities to check customers and entities against sanction lists. However, ineffective processes result in dealing with criminals. This increases the probability of regulated entities being used as platforms for facilitating financial crimes, including ML/FT and PF.

6. Regulatory Fines and Penalties

Sanction screening and due diligence are mandatory requirements that regulated entities need to undertake. When entities do not resolve sanction matches, they fail to comply with Targeted Financial Sanctions (TFS) requirements, and the regulatory authorities impose significant fines and penalties. Thus, unaddressed matches can result in fines and penalties, leading to financial loss.

7. Business Disruption

When the regulated entity fails to address matches, it makes way for potential illicit activities and disrupts business operations. This further hampers the relationships with partners and clients and decreases the overall efficiency and productivity of the business. The regulators can go to the extent of requiring a business to close down if it fails to comply with TFS requirements.

Conclusion

It is important for regulated entities to deploy sanctions screening software, which helps them carry out proper investigations into matches and record their observations. The AML software must help reduce false positives and false negatives in sanctions matches. AML UAE can help regulated entities identify the right AML software to automate their TFS compliance.