Sanction Lists Screening is a critical process to ensure that companies comply with international and local regulations, such as combating money laundering, terrorist financing and corruption. However, one of the biggest challenges of this process is handling false positives, situations in which matches to sanction lists are not actually the correct people or entities.
This article will explain what false positives are, why they occur, and how you can effectively reduce them to protect your business and ensure regulatory compliance without unnecessary disruption.
What is List Screening?
Sanctioned Lists Screening consists on checking, by the obligated subjects, whether a client, supplier, business partner or other counterparty is included in any sanctioned list.
These lists are normally issued by international organizations such as the United Nations, the European Union, or the Department of the Treasury of the United States (OFAC), and contain names of individuals and entities involved in illicit activities such as terrorism, corruption, drug trafficking, and money laundering.
The main objective of Screening is to prevent an organization from establishing commercial relationships with sanctioned persons or entities and, therefore, from being involved in illegal transactions that could lead to a strong economic sanction in addition to the consequent reputational damage.
What are False Positives?
A False Positive occurs when the Screening process generates an erroneous alert, suggesting that a person, whether natural or legal, is on a Sanctioned List when, in fact, this is not the case.
False positives can be caused by multiple factors, among which the following stand out:
- Matches of common names and/or surnames. People with common names and/or surnames are more likely to generate unnecessary alerts.
- Variations in spelling, some due to the adaptation of the name and/or surname to a certain language, the phonetic register (how it sounds) or the use of abbreviations.
- Lack of information. The lists are not as complete as they should be and, in many cases, they omit details such as dates of birth, identification document numbers or country of origin, thereby increasing the possibility of erroneous matches occurring by not having discarding factors.
Although managing false positives is part of the compliance process, improper handling of false positives can lead to serious operational problems, financial losses, and even damage to the organization’s reputation.
Although the management of False Positives is part of the compliance process itself, ineffective management of them can have serious repercussions on an organization.
Impact of False Positives
Some of the most common impacts include:
- Disruption of operations: False positives can block transactions or business relationships, delaying or interrupting the flow of business and affecting the customer experience.
- Additional operational costs: Manual review of false positives consumes time and resources, and has an impact on operational cost. Additionally, specialized personnel are needed to verify these alerts.
- Risk of sanctions for non-compliance: If not managed properly, false positives can lead to the non-identification of people or entities actually sanctioned, which could put the company at risk of legal or financial sanctions.
- Loss of trust: Companies that do not manage false positives well can lose the trust of their customers and business partners, affecting their reputation in the market.
How to Effectively Reduce False Positives
Fortunately, there are effective strategies to reduce false positives without compromising the integrity of the compliance process. Below, we share some of the best practices to optimize screening on sanctioned lists and minimize false positives.
Use Advanced Matching Technology
The most advanced Screening solutions, such as Araua RegTech, use sophisticated algorithms, based on artificial intelligence, that go beyond searching for a simple name match. These algorithms consider aspects such as phonetic variations, identification of synonyms and abbreviations or partial matches.
Always updated lists
Sanctioned lists are constantly updated. The use of outdated data can also generate false negatives, that is, the opposite effect, not identifying people who are actually sanctioned.
More data, greater the precision.
To reduce false positives, companies should collect as much information as possible about their customers and business counterparties. The more details you have, the easier it will be to identify incorrect matches.
Efficient review process
Train your team and train them to identify the differences between a false positive and a legitimate match.
Continuous monitoring
Advanced Screening systems learn from false positives. Continuous monitoring is crucial in that sense.
Conclusion
Screening on sanctioned lists is essential for regulatory compliance and the protection of companies against legal and financial risks. However, false positives can lead to operational and financial problems if not managed properly.
By implementing advanced technologies, updating lists regularly, expanding available data and establishing effective review processes, organizations can significantly reduce false positives and improve the accuracy of their screening.
This not only protects the company from sanctions, but also ensures a more efficient flow of operations and a better experience for customers.
A person decides to file an anonymous complaint, ignoring any data related to his identity. He wants to accompany his complaint with several documents that he has collected as evidence.
And among the metadata of a document that he attaches to the complaint, as the author, we find his name and surname.
Is a Whistleblowing that does not address these situations adequately protecting the whistleblower?