Watchlist
A watchlist is a published list of persons, entities or vessels subject to restrictions. Screening compares customers and payments against it.
Definition
A watchlist is a list of names that a firm must check its customers, counterparties or transactions against. In financial crime compliance the core watchlists are official sanctions lists published by governments and international bodies. The term is also used more loosely to cover law enforcement wanted lists, regulator warning lists, and lists of politically exposed persons, which are not prohibitions but trigger additional checks.
Watchlist screening is the process of comparing names and identifying details held by the firm against those lists, and deciding whether any similarity is a genuine match.
Why a regulated firm cares
Sanctions obligations are generally strict in nature. Making funds or economic resources available to a designated person, or dealing with their frozen assets, can be a breach whether or not the firm meant to do it. Screening is the main way a firm finds out that a customer, a beneficial owner or a payment party is designated before it acts.
Screening is not a one-off event. Lists change frequently and without a fixed schedule, and a customer who was clean at onboarding can be designated later. Firms therefore screen at onboarding, re-screen their customer base when lists change, and screen payments in real time where the product requires it.
How screening works in practice
Choosing the lists. The firm decides which lists apply, based on where it is established, the currencies it handles, where its customers and counterparties are, and its own risk appetite. A UK firm will normally screen against the UK sanctions list; a firm clearing US dollars will usually need to consider OFAC lists; EU entities apply the EU consolidated list; the UN Security Council consolidated list underlies many national regimes.
Preparing the data. Both sides need to be comparable. Customer names are normalised, and list entries include aliases, alternative spellings, dates of birth, nationalities, identification numbers, addresses and, for vessels, identifiers such as IMO numbers.
Matching. Exact matching misses transliterations, reordered names and typing errors, so screening normally uses fuzzy matching tuned to catch plausible variants. The tuning is a documented risk decision: looser settings catch more true matches and produce more false positives.
Reviewing alerts. An analyst compares secondary identifiers to decide whether an alert is a true match, a false positive, or needs more information. The decision and reasoning are recorded.
Acting on a true match. Typical actions include freezing the relevant funds, stopping the transaction, and reporting to the competent authority within the required timeframe. The exact obligations vary by regime.
Ownership and control. Official lists name designated parties, but the restrictions often extend to entities they own or control. Screening therefore needs to cover beneficial owners and, where possible, ownership chains, not only the customer's own name.
Regulatory basis
- FATF Recommendations 6 and 7 require countries to implement targeted financial sanctions relating to terrorism and terrorist financing, and to proliferation of weapons of mass destruction, based on UN Security Council resolutions.
- United States: OFAC administers sanctions programmes under regulations in 31 CFR Chapter V, and publishes the Specially Designated Nationals and Blocked Persons (SDN) List among others. Under the OFAC 50 Percent Rule, entities owned 50 percent or more, in aggregate, directly or indirectly, by one or more blocked persons are themselves treated as blocked, even if not listed.
- United Kingdom: sanctions regimes are made under the Sanctions and Anti-Money Laundering Act 2018, with financial sanctions implemented by OFSI within HM Treasury.
- European Union: restrictive measures are adopted by Council decisions and regulations and apply directly in member states. The EU also applies an ownership and control test, which differs in detail from the US rule.
Firms should confirm which regimes apply to them and how ownership rules are interpreted in each.
Worked example (hypothetical)
A money transfer firm receives a payment instruction naming a beneficiary, the fictional "Orsell Trading LLC". Screening raises an alert against a listed entity called "Orsel Trading Company", with a registered address in the same city.
The analyst compares the details. The registration numbers differ, the listed entity was dissolved before the beneficiary was incorporated, and the beneficiary's directors do not appear on any list. However, the analyst also checks ownership records and finds that one shareholder of the beneficiary holds a minority stake and is not listed. The alert is closed as a false positive, with the identifiers compared and the ownership check noted in the record. The payment proceeds.
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