By Nicolas Poumpourides

I was recently the trainer at an advanced six-hour training session for the staff members of the Cyprus Financial Services Supervisory Authority (CySEC). In the course of training on the subject of the core principles of transaction monitoring, I asked what the differences are between sanctions screening and customer due diligence.

The replies were very interesting, but the conclusions we finally arrived at were as follows.

Sanctions screening and customer due diligence (CDD) are both key components of financial crime compliance (FCC), aimed at preventing illicit activities such as money laundering, terrorism financing and violations of financial sanctions. However, they serve distinct purposes and are carried out in different ways.

Objective:

The primary objective of sanctions screening is to ensure that financial institutions do not engage in transactions with individuals (designated persons), entities, sectors or countries that are listed on government or international sanctions lists, such as the US Office of Foreign Assets Control (OFAC), United Nations Security Council and EU sanctions lists.

It focuses on real-time checking against these lists to prevent financial transactions with sanctioned parties or sectors (sectoral sanctions).

On the other hand, the main goal of CDD is to gather detailed information about a customer to assess the risk of the individual or entity or track down illicit activities, like money laundering, terrorist financing or fraud, and assess if the customer is involved.

CDD is part of a broader Know Your Customer (KYC) process and aims to establish a comprehensive understanding of the customer’s business, ownership structure and risk factors and to find any inconsistencies and suspicious actions in the course of the business relationship or occasional transaction.

Timing:

Sanctions screening is typically done at various stages of the customer lifecycle, but it is a continuous process, including during on-boarding, periodic reviews and before processing transactions.

It can be done in real-time during transactions to ensure no sanctioned parties are involved.

CDD is mostly performed during customer on-boarding, but can also be ongoing, especially if there is a change in the customer’s behaviour, wealth, business or risk profile (incident-triggered).

Scope:

Sanctions screening focuses narrowly on identifying whether a specific person or entity is on any sanctions list or sector. It does not look into broader customer behaviour or business activities unless they are tied to sanctioned entities or countries.

CDD involves a wide-ranging investigation into the customer’s background, including identity verification, beneficial ownership, business operations, source of funds, adverse media, company registrar inventories and transaction patterns. It is broader and more detailed than sanctions screening.

Actionable outcome:

If a match is found during sanctions screening, the transaction must be blocked, or other remedial actions must be taken, such as the creation of a dormant account.

CDD results in a risk assessment of the customer, ie low, medium or high risk. If a customer is engaged in illegal activities, an STR/SAR should be filed in the competent FIU.

Nicolas Poumpourides is an experienced compliance officer with 23 years of managerial experience in the legal, financial services and banking industries