Why Sanctions and Watchlist Screening Matters

When you verify a business, you're not just confirming it exists - you're ensuring you can legally do business with it. That's where sanctions and watchlist screening becomes critical.

Operating in regulated financial services means you cannot:

Process payments for sanctioned entities or individuals
Extend credit to businesses owned or controlled by prohibited persons
Facilitate transactions involving terrorists, money launderers, or sanctioned nations

The consequences of missing a match are severe: hefty fines, loss of banking relationships, reputational damage, and potential criminal liability. In 2023 alone, OFAC issued over $1.5 billion in penalties for sanctions violations.

But here's the challenge: Sanctions lists contain thousands of entries with name variations, aliases, and transliterations. A business named "Global Trading LLC" might be legitimate, or it might be a front for a sanctioned entity using a slightly different name spelling. You need to continuously screen every customer.

The Sanctions and Watchlist Landscape

Different government agencies maintain different lists for different purposes. Understanding which lists matter for your business is essential.

OFAC (Office of Foreign Assets Control)

OFAC, administered by the US Department of the Treasury, maintains lists of individuals and entities with whom US persons and businesses are prohibited from conducting transactions.

Key lists:

Specially Designated Nationals (SDN) List - Individuals and entities with whom US persons cannot do business (terrorists, drug traffickers, weapons proliferators, sanctioned countries)
Sectoral Sanctions Identifications List (SSI) - Targets specific sectors of certain economies (e.g., Russian energy, finance, defense)
Non-SDN Lists - Specialized lists for specific programs

Critical compliance requirements:

US persons and businesses must screen all customers against OFAC lists
Finding a match requires immediate action: stop the transaction, block/freeze assets, report to OFAC

The 50% Rule:

If a business is 50% or more owned (directly or indirectly) by one or more SDN entities, that business is also considered sanctioned, even if not explicitly listed. This means screening ownership structure is as critical as screening the business name itself.

Baselayer's intelligent matching checks by default the business name, its variations, and all associated officers and directors of the company.

PEP (Politically Exposed Persons)

Individuals who hold or have held prominent public positions, representing heightened risk for money laundering, bribery, and corruption.

Who qualifies:

Current or former government officials and legislators
High-ranking judges and military officers
Senior executives of state-owned enterprises
Immediate family members and close associates of the above

Implications for business verification:

Not sanctioned, but trigger enhanced due diligence requirements
If a PEP owns or controls a business, additional scrutiny required:
- Source of funds and wealth verification
- Ongoing transaction monitoring
- Enhanced documentation and senior management approval
Required under anti-money laundering (AML) regulations

Other Watchlists

FBI Most Wanted and Criminal Lists

Known fugitives and criminals
Protects against facilitating criminal activity
Risk-based decisioning for matches

Department of Commerce, Consolidated Screening List

Export control lists (Denied Persons, Entity List, Unverified List)
Critical for customers doing international business
Violations result in export license revocation and penalties

International Sanctions

Consolidated Canadian Autonomous Sanctions List - Required for Canadian operations
EU Sanctions Lists - Essential for European operations
UN Security Council Sanctions - Global baseline for financial institutions

Each list carries different legal implications: OFAC matches require immediate blocking, PEP matches require enhanced due diligence, export control matches may prohibit specific transactions.

Fuzzy Matching and False Positives

Names aren't standardized across sanctions lists. A single person might appear as "John William Smith," "Jon W. Smith," "John W Smyth," or "J. William Smith."

How fuzzy matching works:

Screening systems use algorithms to match names even when not exact:

Phonetic matching (similar sounds: "Smith" vs "Smyth")
Edit distance (number of letter changes needed)
Token matching (individual name components)

Similarity threshold:

Systems assign a match score (0-100%) indicating how similar two names are. Organizations set a minimum threshold (typically 80-85%) above which a match is flagged for review.

Example: "Global Trading LLC" vs "Global Traders LLC" might score 92% similar → flagged
Example: "Smith Consulting" vs "Jones Consulting" might score 45% similar → not flagged

Higher thresholds (90%+) reduce false positives but risk missing true matches. Lower thresholds (70-80%) catch more variations but create more false positives requiring manual review.

The false positive challenge:

Fuzzy matching generates false positives requiring manual review:

Common business names ("Global Trading," "International Consulting")
Common personal names in certain regions
Generic business suffixes ("LLC," "Corp," "Ltd")

Managing false positives:

Collect sufficient identifying information (address, date of birth, TIN, country)
Match on multiple data points, not just name
Document review decisions for regulatory compliance
Establish clear escalation procedures for borderline cases

Ongoing Monitoring Requirements

Regulatory obligation:

Financial institutions and regulated entities are required by law to continuously monitor customers against sanctions lists, not just screen them at onboarding:

Bank Secrecy Act (BSA) and USA PATRIOT Act require ongoing sanctions screening
OFAC compliance programs must include procedures for periodic rescreening
Lists change frequently: new entities added, existing entries updated or removed

OFAC can update multiple times per week - making ongoing monitoring as important as initial screening.

Failure to maintain ongoing monitoring can result in enforcement actions even if initial screening was compliant.

_Baselayer Portfolio Monitoring: _ Baselayer provides automated ongoing monitoring with sanctions data updated daily directly from official government sources (OFAC, FBI, etc.). Customers are automatically rescreened when lists change, with alerts triggered for new matches.