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Sanctions & Watchlist Screening

Last Updated: 2025-12-28 Status: Complete

Quick Reference​

Key Facts:

  • Primary Authority: OFAC (Office of Foreign Assets Control) - U.S. Treasury Department
  • Key List: SDN (Specially Designated Nationals and Blocked Persons)
  • Liability Type: STRICT LIABILITY - civil penalties apply even without intent or knowledge
  • SDN Update Frequency: Multiple times per week (often daily or even hourly)
  • Penalty Range: Up to $356,579 per violation OR twice the transaction amount (whichever is greater)

Critical Numbers:

  • Record Retention: 10 YEARS (extended from 5 years as of March 21, 2025)
  • Global Sanctions Records: 57,000+ active records across 300+ programs
  • False Positive Rate: 90-95%+ in many systems (industry benchmark)
  • 50% Rule Threshold: Entities owned 50%+ by blocked persons are automatically blocked

Topics in This Section​

Explore the detailed sanctions screening topics:

TopicDescription
Fuzzy MatchingName matching algorithms, Levenshtein, Jaro-Winkler, Soundex, and threshold tuning
False PositivesMitigation strategies, entity resolution, and exclusion list management
Screening OperationsReal-time vs batch screening, ongoing monitoring, and record retention
True Match ProceduresBlocking actions, rejection communication, SAR filing, and OFAC reporting
Vendor LandscapeDow Jones, World-Check, ComplyAdvantage, and vendor selection criteria
PayFac ImplementationSponsor bank requirements and transaction monitoring
Enforcement ActionsRecent OFAC cases and lessons learned

Overview​

Sanctions screening verifies that merchants, their beneficial owners, and principals are not on government watchlists or prohibited from conducting financial transactions. This is a legal requirement with severe consequences for non-compliance.

Why Sanctions Screening is Critical​

Strict Liability Standard:

Unlike many compliance violations, OFAC sanctions enforcement operates under strict liability:

  • Civil penalties apply even if you didn't know you were dealing with a sanctioned party
  • Intent is NOT required for enforcement
  • "We didn't know" is NOT a defense
  • Good faith is NOT a defense
  • Penalties can be assessed for each violation (per transaction)

PayFac Responsibility​

As a Payment Facilitator, you are responsible for screening:

  • Every sub-merchant you onboard
  • All beneficial owners (UBOs) of those merchants
  • All control persons, officers, and principals
  • Ongoing monitoring as sanctions lists evolve

Sanctions vs. PEP Screening​

AspectSanctions ScreeningPEP Screening
PurposeIdentify prohibited partiesIdentify higher-risk individuals
AuthorityOFAC, UN, EU (legal prohibition)AML/compliance frameworks
Outcome if matchedMUST BLOCK - cannot do businessEnhanced due diligence required
Legal basisStrict liability enforcementRisk-based compliance
FlexibilityZero - absolute prohibitionCan onboard with proper EDD

OFAC & The SDN List​

What is OFAC?​

The Office of Foreign Assets Control (OFAC) is a division of the U.S. Treasury Department that administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals.

The SDN List​

The Specially Designated Nationals and Blocked Persons List is OFAC's primary sanctions list containing individuals, companies, vessels, aircraft, and other entities.

Consequences of SDN designation:

  • All property and interests in property MUST be blocked
  • U.S. persons are prohibited from dealing with SDN parties
  • No transactions, transfers, or business relationships permitted
  • Applies to direct AND indirect transactions

The 50% Rule​

The 50% Rule

Entities that are owned 50% or more, directly or indirectly, by one or more blocked persons are automatically blocked, even if the entity itself is not explicitly listed on the SDN list.

Key Points:

  1. Aggregate Ownership Counts: Two SDN-listed individuals each owning 25% = blocked (total 50%)
  2. Indirect Ownership Applies: If SDN owns 100% of Company A, and Company A owns Company B, Company B is blocked
  3. OFAC Does NOT Publish These Entities: Compliance burden is on YOU to identify them

Screening Process Flow​

Who Must Be Screened?​

For every merchant application, screen ALL of the following:

  1. Business Entity - Legal name, DBA names, previous names, parent companies
  2. Beneficial Owners (UBOs) - Every individual with 25%+ ownership
  3. Control Persons - Individuals with significant control regardless of ownership
  4. Officers and Principals - CEO, CFO, COO, board members, authorized signers
  5. Related Entities - Parent companies, subsidiaries, sister companies

Self-Assessment Questions​

Q1: What is the legal standard for OFAC sanctions violations?

Click to reveal answer

Strict liability - civil penalties apply even without intent or knowledge. "We didn't know" is not a defense. Each violation can result in penalties up to $356,579 or twice the transaction amount.

See Enforcement Actions for recent cases.

Q2: What happens if a merchant is found on the SDN list during onboarding?

Click to reveal answer

You MUST:

  • Immediately reject the application (do NOT onboard)
  • Block all transactions
  • Do NOT tip off the merchant (do not mention sanctions)
  • File SAR if required
  • Notify sponsor bank immediately
  • Document all actions and evidence

See True Match Procedures for complete process.

Q3: Why is ongoing screening necessary after onboarding?

Click to reveal answer

Multiple reasons:

  • SDN list updates daily (sometimes hourly)
  • Existing merchants can be added to sanctions lists
  • Beneficial ownership can change (new UBO may be sanctioned)
  • OFAC expects continuous monitoring, not one-time screening

See Screening Operations for monitoring frequency.

References​

Official OFAC Resources​

Additional Sanctions Lists​

Regulatory Guidance​

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