Sanctions screening

Sanctions compliance is becoming an increasingly urgent and critical component of financial institutions' (FIs) regulatory obligations. This development is closely linked to the changing geopolitical climate, where international tensions, such as the war in Ukraine, the situation in the Middle East, and sanctions against Russia and Iran, have led to a flood of complex sanctions regimes.

Simultaneously, legislators and regulators at both the national and European levels have tightened their expectations. FIs must demonstrate that they proactively and systematically screen individuals, entities, goods, and transactions that are subject to sanctions. This increasing pressure, combined with the speed at which sanctions can change, makes sanctions screening a continuous challenge for FIs.

Types of financial sanctions

It is essential to understand the specific obligations imposed by both European Union Regulations and national sanctions requirements. Non-compliance with these obligations may lead to severe judicial, financial and reputational risks. The various types of financial sanctions include:

Directives to freeze the financial assets of specific individuals and organisations.
Prohibition on providing resources to these individuals or organisations, either directly or indirectly.
Restrictions or outright bans on offering financial services to individuals, entities, or goods.

This page dives deeper into the topic of sanctions screening and how PwC supports your organisation in this field.

National Sanctions regulations

Under the Sanctions Act 1977 (‘Sanctiewet 1977’), and Regulation on Supervision pursuant to the Sanctions Act 1977 (‘Regeling toezicht Sanctiewet 1977’), FIs such as banks, insurance companies, and payment service providers (PSPs) must always be able to detect whether any of their business relations, goods and/or transactions are subject to sanctions. If so, they must freeze financial assets immediately, prevent further provision of financial assets or services and report the sanctions hit to the regulator.

What is Sanctions screening?

Sanctions screening is the process of detecting transactions or relationships with individuals or entities listed on sanctions lists. The relationship concept (“relatiebegrip”) is broadly defined as covering any party that is involved in a financial service or financial transaction. FIs are required to have in place effective sanctions screening tooling to comply with the applicable sanctions regulations.

Sanctions screening typically consists of two primary methods:

Name screening: Checking customer names and related parties (e.g. legal representatives and Ultimate Beneficial Owners) against mandatory national and international sanctions lists (for example, as issued by the EU, UN, US/OFAC, and the Dutch government).
Transaction screening*: Monitoring transactions to detect potential sanctions violations, such as but not limited to payments to sanctioned entities. Sanctioned transactions should be blocked before they are executed.

*Also called transaction filtering or transaction monitoring for sanctions purposes. Transaction screening is typically only applicable to FIs that execute transactions.

FIs use these types of screening to prevent facilitating prohibited transactions or providing services to sanctioned individuals or organisations.

Sanctions tooling effectiveness

Effectiveness is the ability of the FI’s systems to correctly identify sanctioned names and transactions to comply with sanctions regulations. This includes, among others, the effectiveness as watchlists are updated, as you onboard new clients, execute transactions or as you pay out to new third parties.

Exact matching vs. Fuzzy matching

Sanctions screening tools rely on algorithms to compare names against sanctions lists. Two key matching techniques are used simultaneously:

Exact matching: Only exact character matches in spelling between the screened relation, or transaction data and the sanctions list produces a hit.
Fuzzy matching: Uses similarity algorithms to detect close matches (e.g., ‘Steven’ vs. ‘Stephen’), reducing false negatives but increasing false positives.

Regulatory bodies like DNB recommend using fuzzy matching¹ with a calibrated threshold to balance detection accuracy and operational efficiency. A comprehensive testing and optimisation framework can be used for defining optimal thresholds and enhancing system performance. To assess the effectiveness of their sanctions tooling, FIs are expected to perform periodic effectiveness testing of their sanctions tooling.

_{¹The DNB performed Sanctions Act examinations and made recommendations about fuzzy matching (“Results of DNB’s examinations on compliance with sanctions regulations”)}

Sanctions tooling efficiency

Sanctions compliance must not only be effective, but also efficient. FIs need well-calibrated screening tools to limit the number of false positives while ensuring real risks (i.e., true positives) are still detected.

Tooling calibration

The calibration of tooling settings (configuration) is one of the most important factors to ensure both effectiveness and efficiency of the selected tooling platform. Sound calibration of sanctions screening tools allows for the tooling to be demonstrably aligned to your risk appetite (for example, in terms of fuzzy matching percentage) as well as to applicable regulatory requirements.

Following effectiveness testing, the calibration of certain settings can be adjusted where needed to ensure this alignment is maintained throughout time. Documentation of screening methodologies and decisions ensures auditability and Compliance.

Sanctions screening: How PwC can help

We can support in all areas to ensure your existing or future sanctions screening process is effective (i.e., compliant) and cost-efficient.

With our market insights about the available vendors of sanctions tooling systems, we help you identify which tooling platform works best for your organisation.

Target solution definition with the detailed business requirements, RFI and RFP preparation.
Market insights about the vendor landscape to identify relevant vendors, as well as identifying relevant differences between vendors.
Technical evaluation of a proposal, scoring methodology and proof of concept.

With our experience in tooling implementations at some of the largest FIs in the Netherlands, we have a deep understanding of the key challenges and how they can be overcome.

Seamless integration between CRM, client and third-party administration and case handling systems. Our experience with many of the most used systems is an essential contributor to seamless integration of new sanctions tooling.
Combining regulatory expertise and experience with operational challenges to tailor implementation to your organisation's needs whilst staying compliant with sanctions regulations.

Our data-driven sanctions tooling assessments helps you to identify the performance of your screening tooling (both transaction monitoring / transaction filtering for sanctions purposes and name screening systems).

Targeted assessment diagnostic capabilities:
- Data quality assessment to identify which records are by mistake not always screened.
- Tooling effectiveness assessment to identify your compliance with exact matching and fuzzy matching regulatory requirements (i.e., the effectiveness of your sanctions tooling system) and identify relative performance against selected peers.
- Tooling efficiency assessment to identify potentially irrelevant alerts that are being generated by the existing tooling configuration.
Rapid deployment for diagnostics through automation and experience. The tooling effectiveness assessment can for example be performed in a matter of weeks.

Unnecessary false positives is a burden to operational efficiency and should be minimised where possible. Our best-in-class optimisation framework focuses on finding the right balance between the cost of compliance and appropriate coverage of Financial Crime risks.

Combining subject matter expertise and advanced data analytics.
Supported by our proprietary applications driven by advanced analytics that improve and accelerate the optimisation efforts.
We have supported multiple banks, insurance companies, payment institutions and other FIs in the Netherlands with bringing their exact matching and fuzzy matching in line with the applicable regulatory requirements. Our optimisation methods have resulted in false positive reductions of over 50-60% for multiple clients in the first year.