International financial sanctions prevent financial crimes in the domestic and international financial eco-system. Under the AML: Anti Money Laundering regulations, it is becoming a necessity for financial institutions to regularly assess customer risks.
Links that may be overlooked under AML regulations may expose financial institutions to criminal sanctions. Therefore, they should adopt a risk-based approach in KYC processes.
Financial institutions should analyze customer risks in detail in order to protect corporate image and prestige.
What is Sanction Scanning?
Prevention of financial crimes has high importance for the healthy functioning of the global financial system, both for governments and international organizations, as well as for commercial enterprises. National and international regulations require financial institutions to conduct a risk-oriented customer risk analysis through sanctions.
International regulators play an important role in regulating actions and measures related to financial crimes and other crimes that threaten the financial system’s integrity. KYC processes, suspicious transaction reports, internal audit and training strategies, and enforcement compliance are just some of these regulations.
The main regulations that can be accepted as a basis for KYC procedures in place in the USA, Europe, and the UK are: Bank Secrecy Act (BSA), 4th EU Anti-Money Money Directive, and FATF (Financial Action Task Force) Guidance, CTF Terrorist Financing prevention, etc.)
Sanction Screening and Politically Exposed Person (PEP) screening within the scope of regulations for financial institutions subject to local and international regulations is becoming necessary to minimize legal and reputational risks.
The way to minimize risks is to carry out a regularly updated KYC process, starting with customer registration
What is KYC?
The personal information of the customer, the verification of the information, and the nature, purpose, and risks of the business relationship of financial institutions with customers are determined in the KYC: Know Your Customer process. Evaluation requires updating not only as part of the customer onboarding process but also according to the constantly changing business and environmental conditions.
In KYC processes, the compliance of existing or new customer identities with regulations is also checked to prevent financial crimes within the framework of corporate policies. KYC procedures, whose main purpose is to prevent criminal financial activities such as money laundering, corruption, or terrorist financing, fulfill this function by using various screening processes.
Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD) are carried out using appropriate software to analyze risks within the framework of KYC procedures:
- correct identification of customer identity and connections,
- identifying certain financial crime risks that may encounter,
- taking preventive measures,
- monitoring and reporting suspicious financial activities to regulators.
Through technology, it becomes possible for financial companies to automate their CDD and EDD processes. By making customer risk assessments in a certain order, processes become compliant with regulations, and companies can remain competitive by reducing customer risks.
The FATF classifies politically exposed persons as low, medium/low, intermediate, and high-risk groups based on their risk level. In addition, the compatibility of the technologies to be used with up-to-date information ensures correct risk management.
In addition, the FATF considers some countries at high risk due to geographical factors. These; Countries with a high risk of corruption may include countries that have not signed an anti-corruption convention, such as the OECD Anti-Bribery Convention and UNCAC and countries listed as lacking adequate AML/CFT systems.
PEP and Sanction Scanning Practices
Although risk analysis is important for all business enterprises, financial institutions need to adopt a risk-based approach. For example, in the KYC processes, some actions are carefully examined in detecting risky people and in the follow-up of suspicious behaviors to be reported to the regulators when necessary.
PEPs could hide the source of their funds or wealth, the constant movement of funds between countries, the lack of sufficient explanation and details for certain business relationships and transactions, anonymous payments from unidentified third parties, the use of corporate tools to manipulate financial systems, massive global fund transfers, etc. are just a few of these questionable behaviors.
Using technologies that detail all these risk factors in the database is very important for financial institutions to carry out a successful KYC process. To automate customer processes in the workflows of financial institutions, customer onboarding processes, integration with global risk management systems, and compliance verifications are now necessary.
Presenting solutions with user-friendly applications is an important factor in the healthy functioning of sanction compliance processes. In addition, using applications that provide a large database and software with the infrastructure and technology to respond quickly to sudden and sensitive changes in the global environment ensures the effective use of KYC procedures.