Sanctions Screening vs Transaction Monitoring: What's the Difference?

Sanctions screening and transaction monitoring are two of the most commonly used terms in today’s Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) landscape. However, it is very easy to confuse what they actually mean, especially when they are mentioned together most of the time. In this post, we cover what each term means and what their principal differences are.

Sanctions Screening: Catching Who Is Bad

Sanctions screening is used to identify individuals, entities, vessels, aircraft, or jurisdictions subject to economic or trade sanctions so that institutions can avoid risky business relationships and compliance issues down the road.

If the scanned entity turns out to be sanctioned, the institution should not proceed. Then, it must block, freeze, or report in accordance with applicable regulations. If there is no match, the transaction or relationship can be allowed from a sanctions perspective.

During this process, the individual or the entity is matched against official sanctions lists such as OFAC, Specially Designated Nationals (SDN) List, EU Consolidated Financial Sanctions List, United Nations Security Council Sanctions Lists, and HM Treasury (UK) Consolidated List.

In these lists, one can find designated persons and entities subject to certain measures. These range from asset freezes to trade/sectoral restrictions. In order to determine whether there is a match or not, numerous factors are scanned, such as names, aliases, date and place of birth, nationality, addresses, registration numbers, vessel or aircraft identifiers, and ownership data.

There is an important way in which sanctions screening differs from AML transaction monitoring. Unlike the latter, there is no “suspicion threshold” in sanctions screening. This is due to the fact that it does not rely on patterns or probability. Instead, the reference point is the legal designation status.

Sanctions screening is not a one-time process. Therefore, it should be applied at multiple stages of the customer and transaction lifecycle. There are three crucial stages where it should be conducted: during customer onboarding (for the customer, beneficial owners, directors or controlling persons, and sometimes key counterparties), before transaction (for the originator, beneficiary, sometimes intermediaries or correspondent banks, and payment message fields), and periodically for existing clients.

Screening systems often generate alerts for potential matches. However, these alerts are not enough on their own. In order to verify its status as a false positive (similar name, not the same party) or a true match (actual designated person/entity), it is often recommended that compliance professionals review the results.

If the compliance team verifies that it is indeed a true match, the institution must take applicable actions. These actions often consist of directly blocking/freezing funds and rejecting the transaction. However, more often than not, it is also obligatory to file a report with the relevant authority and to document the decision trail.

What Sanctions Screening Is Not?

It is important to distinguish sanctions screening from other financial crime controls. In short, it determines whether a legally prohibited party is involved based on official designation status. Therefore, a business should not expect it to analyze transaction patterns, detect fraudulent methods such as structuring or layering, or assess unusual behavior.

It should be noted that sanctions screening is not designed to analyze transaction patterns over time, detect structuring or layering, assess unusual behavior, evaluate risk scoring models, or replace transaction monitoring.

Transaction monitoring is a risk-based behavioral detection control for identifying unusual or potentially illicit financial activity such as money laundering or terrorist financing.

While sanctions screening answers the question “Is this a prohibited party?”; transaction monitoring, on the other hand, answers “Does this activity raise any suspicion?”. As one would expect, it does not rely on official designation lists. What it relies on can be summarized as patterns, volumes, frequency, counterparties, geographies, and customer risk profiles over time.

There are many international AML/CTF standards that require transaction monitoring. However, there are three of them that require utmost attention:

• FATF Recommendation 10 - Customer Due Diligence (including ongoing monitoring)
• FATF Recommendation 11 - Record-keeping
• FATF Recommendation 20 - Reporting of Suspicious Transactions

These three recommendations require financial institutions to monitor customer activity and examine transactions. Here, the goal is to ensure that customer activity remains consistent with the institution’s knowledge of the customer, their business activities, and their risk profile.

Within the European Union, similar obligations are embedded in the AML Directives (AMLD IV, V, and VI). These also require ongoing monitoring and the reporting of suspicious transactions to Financial Intelligence Units (FIUs).

It is easy to mix up what transaction monitoring evaluates. Briefly, it assesses the behavior, not the names. To evaluate the behavior, there are often rule-based scenarios and risk-scoring models that generate alerts when an action exceeds these thresholds.

Many factors come into play during transaction monitoring: transaction amounts, frequency and velocity, geographic corridors, counterparty risk, changes in behavior, structuring patterns, use of high-risk jurisdictions, rapid movement of funds, dormant account reactivation, and unusual cash activity.

The Risk-Based Approach

As mentioned before, transaction monitoring is a risk-based approach, which is also emphasized by FATF’s frameworks. Its points of calibration involve factors such as customer risk rating, product risk, channel risk, and geographic exposure. However, FATF and FIUs often publish typologies and internal risk assessments as well. When a customer is deemed higher-risk, they must be subjected to enhanced scrutiny and potentially lower alert thresholds. This is another important aspect that differentiates it from sanctions screening because it applies regardless of customer risk.

When transaction monitoring generates an alert, compliance teams must review it to assess the activity in context based on CDD information, KYC profile, and history. However, there is another crucial action to take after this step: If the suspicion persists, organizations must file a Suspicious Activity Report (SAR) or Suspicious Transaction Report (STR) with the relevant authority.

There are indeed multiple ways in which transaction monitoring can function. It could be real-time (post-authorization but pre-settlement in some systems), batch-based (daily monitoring), periodic (retrospective reviews), or through thematic investigations. This makes it a rather continuous and dynamic process. On the other hand, sanctions screening is relatively event-driven.

It should be noted that transaction monitoring does not replace sanctions screening by any means. It does not determine designation status, operate as a binary legal control, or guarantee prevention of financial crime. Instead, it can be reframed as a detection and escalation mechanism.

Side-by-Side Comparison Table

Why You Need Both: The Compliance Gap

When it comes to compliance, sanctions screening and transaction monitoring go hand in hand because each addresses a different regulatory risk. When one of them is missing, or even poorly implemented, a material compliance gap is likely to emerge.

What Sanction Screening Misses

As mentioned a few times before in this post, sanctions screening answers only one question: “Is this party designated or otherwise legally prohibited?”. If the answer is “no”, screening will be satisfied from a sanctions perspective. However, this still doesn’t mean that activity is low-risk.

There are numerous actions that sanctions screening alone will not be able to detect, such as structuring (smurfing), layering, or activity inconsistent with the customer’s expected behavior. Therefore, we must reiterate that sanctions screening does not completely eliminate risk in a business relationship because an unsanctioned person may still launder funds, finance terrorism, commit fraud, or evade taxes.

Transaction monitoring evaluates numerous factors, such as behavior against risk models and typologies. Yet, it does not verify whether a counterparty is legally prohibited or not. Monitoring systems are usually calibrated in such a way that they detect any deviation from expected activity, suspicious patterns, risk indicators, and threshold breaches. Nevertheless, they do not determine sanctions designation status.

Let’s give an example to illustrate this. If a person makes a single $500 transfer, it would not trigger any behavioral monitoring rules because it appears ordinary enough. However, if the individual turns out to be designated under OFAC, EU, UN, or UK sanctions, this would require a different approach to this particular transfer. There are multiple actions that may need to be taken for these types of situations, which range from legally prohibiting the transaction to freezing the funds. Furthermore, the institution may face enforcement exposure if it processes the payment.

Where They Overlap: Sanctions-Related Transaction Patterns

Up until now, we have covered how structurally distinct they are, but this does not mean that all of their use cases are strictly different. There are many high-risk scenarios that require both of these controls to work together such as sanctions circumvention, indirect exposure, or complex transaction structures. In these cases, while screening is used to identify prohibited parties or sanctioned jurisdictions, monitoring is used to detect the circumvention technique or suspicious pattern.

Sanctions Circumvention Through Intermediaries

This one is definitely one of the most common evasion strategies in financial crimes. Sanctions circumvention through intermediaries refers to a designated individual or entity attempting to access the financial system indirectly. Let’s give an example to better illustrate how this exactly happens.

In order to obscure the origin of the funds, a sanctioned individual may opt for using the accounts of a relative, associate, or front company to transfer them through multiple accounts. There are two particular ways to identify this pattern. The first one consists of screening the true beneficial owner or connected party, and the other one is the listed individual appearing directly in payment fields. However, this information may not always be visible, and this is exactly where transaction monitoring comes into play. It could rapidly flag the activity due to its inconsistency with expected behavior.

Another common method is trade-based money laundering involving sanctioned jurisdictions. This occurs when sanctioned individuals or entities use numerous methods to obscure their dealings with sanctioned destinations. These are, in particular, over-invoicing or under-invoicing, phantom shipments, misdescription of goods, or third-country routing to avoid sanctioned destinations.

As an illustration, a company may route exports that ultimately benefit a sanctioned jurisdiction through a non-sanctioned intermediary country. In such a case, screening can flag the ultimate counterparty or jurisdiction, and screen shipping companies, vessels, or counterparties against sanctions lists. However, screening is still not enough by itself in this case. An integrated monitoring system could simultaneously detect unusual trade corridors, identify mismatches, flag rapid trade flows inconsistent with historical partners, and detect repeated use of the same high-risk routing path.

Nested correspondent banking refers to a foreign respondent bank accessing the financial system indirectly through another bank’s correspondent relationship. Institutions can use screening to cover known correspondent relationships and named counterparties in payment messages. At the same time, monitoring can detect unusual transaction flows, flag sudden volume increases from high-risk jurisdictions, identify concentration risks inconsistent with the business model, and detect velocity anomalies.

Why An Integrated Solution Is Needed?

Up until this point, it should be clear how indispensable sanctions screening and transaction monitoring are when it comes to maintaining compliance. However, this does not mean that it is enough to set these systems up and leave them be. If these two tools are not working harmoniously, organizations are likely to face numerous fragmentation issues such as disconnected alert queues, separate case management tools, unrelated customer risk assessments, delayed information sharing, and duplicative investigations. All of these dramatically increase operational risk, investigation time, and regulatory exposure.

The problem with siloed controls remains very prevalent in many institutions due to the positioning of sanctions screening and transaction monitoring under different departments. So, what may this result in? Different case management tools, risk scoring models with varying inputs, and independently reviewed alerts, which are among the clearest ways to create blind spots.

For example, a customer may generate related low-level monitoring alerts and appear in a weak sanctions name match at the same time. This would not create any suspicion for each team. However, both of these parameters must be taken into account to assign an accurate risk profile, and independent evaluations simply do not allow this.

What an Integrated Platform Achieves

An organization with an effective integrated solution can easily address these problems thanks to having access to both control mechanisms in a single system that includes sanctions list screening, payment screening, ongoing transaction monitoring, customer risk scoring, and case management. When such a unified architecture is implemented, customer identifiers and risk indicators will be shared, data will be synchronized in real-time, and duplication will be reduced.

We have briefly mentioned this in the first part, however, it must be elaborated further due to its importance. Signal correlation refers to the ability to see how indicators appearing minor on the surface can result in elevated risk when combined.

Let’s say a customer initially passes sanctions screening successfully but a few months later, the customer’s name starts to generate a weak match during a list update. Normally, this would not warrant any type of escalation. However, at the same time, transaction monitoring starts to flag a series of international transfers that fall just below high-risk thresholds in the same period. Now, this may start to become problematic.

If these signals are not assessed together, the overall risk profile remains as it is. With the help of an integrated platform, institutions can recalculate the customer’s aggregate risk score and trigger enhanced due diligence or escalation. Therefore, it is recommended to implement this type of layered assessment in order to reflect the reality of financial crime risk in the most accurate way.

Beyond being a mere regulatory alignment, integration brings much more to the table. A unified system can reduce duplication of effort, shorten investigation cycles, and eliminate the inefficiencies that come with parallel case management tools by allowing investigators to access a comprehensive view of customer risk without the burden of disconnected databases or reconciling inconsistent risk ratings. It should also be mentioned that integration reduces the risk of contradictory outcomes and brings several advantages over time as well, such as improved tuning precision thanks to shared data inputs.

Regulatory Expectations: What Examiners Check

There might be misconceptions about how regulators approach sanctions screening and transaction monitoring. Generally, they evaluate these as part of an institution’s overall governance, risk management, and internal control framework. Therefore, organizations should not expect questions such as “Do you have a screening system?” or “Do you have monitoring scenarios?”. What regulators actually assess is how the institution’s controls are designed, calibrated, governed, tested, documented, and responsive to evolving risk factors.

United States (FFIEC/BSA/OFAC)

When it comes to compliance with the U.S., the FFIEC BSA/AML Examination Manual serves as a reliable reference point. Under this manual, examiners evaluate the efficiency of suspicious activity monitoring and reporting systems, which may include assessing whether it is risk-based, alerts are properly investigated, and SAR decisions are appropriately documented and filed.

Institutions can also easily consult the dedicated section on OFAC compliance in the FFIEC Manual. The objective here is basically to assess whether the institution maintains a risk-based OFAC sanctions compliance program appropriate to its products, services, customers, and geographic exposure.

Also, as stated in the manual, OFAC regulations are not part of the BSA, but what does this mean for institutions? It underlines once again that sanctions compliance and AML monitoring are distinct legal frameworks. These may be easy to get mixed up since there are instances where they are even reviewed during the same exam cycle.

In short, it is possible to summarize what examiners expect as documented AML monitoring, a SAR program, and a documented OFAC/sanctions compliance program. Of course, there are also other important points such as governance, escalation, and independent testing that should not go unmentioned.

FATF (International Standards)

Based on FATF Recommendations, there is a clear separation between ongoing monitoring of business relationships, suspicious transaction reporting (e.g., Recommendations 10 and 20), and implementation of targeted financial sanctions related to terrorism and proliferation (e.g., Recommendations 6 and 7).

These are structurally different obligations under global AML/CFT standards. Once more, this underlines that monitoring suspicious activity is considered a totally separate activity from implementing sanctions designations. Also, it should be noted that FATF expects jurisdictions to implement both capabilities independently.

European Union (AMLD Framework and Restrictive Measures)

Within the EU, AML monitoring obligations arise under the Anti-Money Laundering Directives (AMLD) framework. This framework requires ongoing monitoring and reporting of suspicious transactions to Financial Intelligence Units. On the other hand, sanctions compliance (EU “restrictive measures”) is governed separately under EU sanctions regulations.

The guidelines set by the European Banking Authority (EBA) also play an important role. These clearly illustrate what is expected from institutions. In the guideline, one can find the key requirements such as internal policies, procedures, and controls that ensure implementation of Union and national restrictive measures.

Core Supervisory Principle Across Jurisdictions

As can be seen in the previous three sections, the separation of transaction monitoring/suspicious activity reporting, and sanctions screening/restrictive measures compliance remains constant. Furthermore, regulators also expect institutions to maintain documented policies, governance structures, and testing processes for each. It should also be noted that even if the both controls operate within a unified technology platform, this is still required.

Emir Gürel

Content Writer

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