In your personal life, have you ever gotten involved with someone who seemed great at first, only to later realize they weren’t who they appeared to be? Maybe you wished there had been some sort of warning system or a heads-up someone could have given you before getting any further.
For governments and organizations, this is exactly what a watchlist does. Watchlists give banks, government agencies, and other institutions a resource to flag high-risk individuals or entities before engaging with them.
So, just as you would have appreciated a heads-up about that sneaky friend, watchlists help prevent costly fraud by providing organizations with an early warning signal about who they’re getting involved with.
What are Watchlists?
As the name suggests, watchlists are a compilation of individuals or entities that have been linked to illegal or high-risk activities, received sanction violations, or have known connections to terrorist or criminal organizations. They are often public databases, and frequently updated by the government as new details emerge.
Organizations like financial institutions can consult these lists before engaging with a new customer, often during the customer due diligence (CDD) process. This is also referred to as “watchlist screening.”
There isn’t just one centralized “watchlist” that contains all people or groups of interest. Instead, organizations will often review several key watchlists to meet regulatory requirements and mitigate the risk of fraud, including:
- Domestic Terrorist Watchlists
- U.S. Treasury’s Office of Foreign Assets Control (OFAC) Sanctions List
- Politically Exposed Persons (PEPs) List
- Financial Action Task Force (FATF) High-Risk Jurisdictions List
- FBI Most Wanted List
- Specially Designated Nationals and Blocked Persons (SDN) List
- United Nations Security Council Sanctions List
- World Bank Debarred Entities List
- Interpol Red Notices
While it could get extremely tedious and time-consuming to manually check each of your customers against all major watchlists, there are now numerous automated solutions that can handle this process for you.
The Benefits of Watchlist Screening
One primary benefit of watchlist screening is that it can help organizations proactively avoid working with known fraudsters and criminals. Of course, not every customer who ends up engaging in fraud has a documented criminal history and will be flagged during this process. However, watchlist screening does give financial institutions an easy way to identify those who might pose a risk or defraud the organization, given their background.
For example, let’s consider a new business banking customer who wants to send a large wire transfer. The transaction might appear legitimate at first glance, as the customer claims it will be sent to an international client for business dealings. However, before finalizing the transaction, the bank conducts its standard CDD procedures, cross-referencing the customer’s information with government watchlists.
During the screening process, the bank discovers one of the company’s owners is flagged on an OFAC sanctions list for their involvement in a money laundering scheme. Upon making this discovery, the bank can block the transaction and avoid participation in possible criminal activity. Even if the bank is unknowingly involved in illicit activities, it could still face significant reputational damage and legal consequences.
In this way, watchlist screening also supports compliance with regulatory standards like Know Your Customer (KYC) and Anti-Money Laundering (AML), helping institutions avoid costly fines and penalties.
The Real-Life Power of Watchlists
Throughout history, there have been notable instances of watchlists helping financial institutions prevent fraud and other illegal activities.
One of the most well-known examples is the OFAC sanctions list, which has helped block billions of dollars in funding to state-sponsored terrorist groups, as reported by the U.S. Department of the Treasury’s Office of Foreign Assets Control. Thus, the mere existence of this list has helped cut off large terrorist organizations’ access to global financial markets.
It’s worth noting that there are also consequences to ignoring such lists. For example, in 2022, the U.S. imposed multiple sanctions on Russian financial institutions in response to its invasion of Ukraine. That year, the OFAC issued over a dozen enforcement actions to entities that violated the sanctions, with total financial penalties of $42.7 million. To date in 2024, fines for sanction violations have already topped $31 million.
Common Challenges of Watchlist Screening
Watchlist screening isn’t an entirely foolproof solution to combating fraud. This practice has some potential drawbacks that organizations should be aware of, such as:
- Operational costs: If you’re not using automated watchlist screening solutions, it can become very resource-intensive to have someone on your team manually check these databases as needed to conduct CDD. On the other hand, implementing robust solutions can be costly, especially for smaller institutions.
- Privacy concerns: Customers may not like the idea that their information is so heavily scrutinized, even if they are not included on government watchlists. This can lead to a sense of distrust or surveillance if not handled properly.
- False positives: Legitimate customers with names similar to those on government watchlists may be denied services. In this case, further investigation may be required to verify that they are separate individuals.
- Data Accuracy: Depending on the specific list, it may not always include the most accurate and up-to-date information, leading you to believe that a customer isn’t as risky as they actually are, compromising your fraud prevention abilities.
Final Thoughts on Watchlist Screening for Fraud Detection
Financial institutions rely on watchlist screening to comply with AML and KYC laws, while enabling them to proactively avoid known fraudsters. In turn, these organizations can safeguard their operations against costly fines and penalties and reputational loss, gaining the peace of mind that they’re only working with customers that have legitimate business dealings.
For more information on the emerging threats and trends with global identity fraud, check out our 2024 State of Identity Fraud report.