The success of a financial firm depends on the effective implementation of their risk management strategy, in order to avoid criminal clients and stay away from financial disasters in the form of regulatory fines and as in extreme cases, insolvency. Their primary risk management strategy includes compliance with Anti-Money Laundering regulatory guidelines such as sanctions watchlists screening.
Compliance protocols like watchlist screening helps financial firms build a trustworthy customer base and safeguard their financial health. Since, the financial industry stands at the forefront of facilitating criminal activities and dealing with fraudsters and scammers directly, therefore, the onus is on the firms to play their part in the prevention of financial crimes.
Watchlist screening process helps financial firms to filter out clients who may be involved in criminal activities and are wanted by the law enforcement agencies. It helps to make informed decisions before onboarding a client to initiate a business relationship.
Compliance protocols like Sanctions Watchlist Screening provides financial firms to know their customers better and delve deeper into their financial history and detect any fraudulent activities by running AML/KYC processes.
How Watchlist Screening Helps Firms Build Trustworthy Client Base?
Businesses like financial firms deal with thousands of clients coming from obscure backgrounds. Before initiating a business relationship with a prospective client, it is a matter of life or death for a firm to make sure they won’t end up entangled with a client and their criminal activities. Financial firms are an easy target for the financial scammers and fraudsters, given the rising sophistication in the execution of financial crimes like money laundering, tax evasion, identity theft, terrorist financing, counterfeiting, card fraud, insider trading, drug trafficking, billing schemes, skimming, insurance fraud, embezzlement of state funds, market manipulation, bribery and corruption.
Compliance tools like watchlist monitoring helps firms to have a proactive approach in terms of dealing with clients that are probably involved in fraudulent activities.
What Makes Up a Watchlist?
Watchlists are computerized records of individuals, groups and organizations that may be taking part in illegal activities like money laundering and terrorist financing and require risk based approach by financial firms due to legal and political grounds. It also comprises a list of politically exposed persons (people sitting in the corridors of power and hold immense social and economic power), individuals with scandalous reputation due to unfavorable adverse media as well as sanctioned individuals, groups, organizations and countries.
As per 2024, there are approximately 250 sources of watchlists working in over 195 countries in the financial world today. These watchlists are meant to provide regulatory guidelines to the regulated financial firms (such as P2P lenders, investment banks, money market funds, insurance companies, private equity funds, hedge funds, and mortgage lenders) as well as non-financial institutions such as the casino and gambling industry, art dealers, the gold and diamond industry, and the real estate sector. These regulatory organizations and law enforcement agencies update their data on a regular basis in different languages and formats.
What Does It Actually Mean To Comply With Watchlists?
As for the financial firms, acting in accordance with the regulatory guidelines implies meeting the financial reporting standards, following the accounting principles, and abiding by the tax regulations. Financial firms stay vigilant in crafting financial statements in compliance with applicable standards and diligently update reliable financial records, and meet all the tax regulations including paying the national taxes and timely filing the government tax returns.
Following the financial regulatory guideline not just benefits the financial ecosystem but it also benefits the firm itself by enhancing its market credibility. AML watchlist benefits all the stakeholders in the financial ecosystem by enhancing the transparency of the financial institutions, accountability of businesses and integrity of the international financial system.
What Happens When You Don’t Screen Your Customers Against Watchlists?
The illicit flow of funds in the legitimate financial system facilitates financial crimes. Financial crimes like money laundering, corruption, bribery, embezzlement of state funds, human trafficking, corporate frauds, tax evasion, smuggling of weapons & drugs and terrorist financing hurt economies across the globe and have adverse macroeconomics loss.
Every single year, financial crimes end up causing billions to trillions of financial loss for the world economy which resultantly widens the societal wealth gap causing political instability across nations which leads to unstable economies and high poverty rates. Facilitating financial crimes by the big financial institutions affects the livelihoods of the country’s middle class.
The indirect costs of neglecting watchlist compliance causes massive damages to the integrity of the international monetary system as well as government agencies, and regulatory bodies. Facilitating terrorist financing ends up destabilizing the whole country, causing the displacement of millions of innocent individuals and loss of infrastructure as well as precious lives as in the case of ISIS in Iraq and Syria. It not just threatens international peace but also propels the economic progress of nations multiple decades backward.
Therefore, there is a reason why government agencies of all countries and international regulatory bodies such as the Financial Action Task Force (FATF) spend millions of dollars in implementing financial regulations like watchlist screening to prevent financial crimes that disrupt the whole society.
