AML Blacklists and Sanctions: How Banks Detect Risky Clients

A blacklist is a list of people, companies, or countries that are considered high-risk or involved in illegal activities like money laundering, fraud, or terrorism financing. Financial institutions use these lists to avoid doing business with risky clients and stay compliant with anti-money laundering (AML) laws.

Types of Blacklists Used in AML

• Sanctions Lists: Lists of individuals, companies, or countries banned from conducting business due to criminal activities or violations of international laws.
• Politically Exposed Persons (PEPs): High-ranking officials who might be at higher risk for corruption.
• Adverse Media Lists: People or companies flagged in the media for illegal or suspicious activities.
• AML-Specific Blacklists: Lists focused on people or organizations involved in money laundering.

Example:

XYZ Bank receives an application from a company called Oceanic Trading Ltd. based in the Cayman Islands, a known tax haven. The company wants to open a business account for international trade.

Step-by-Step Breakdown:

1. Initial Screening

XYZ Bank runs a check using its system to see if Oceanic Trading Ltd. or its owners are listed on any blacklists, including the OFAC list (U.S. sanctions list).

2. Red Flags Identified

The screening reveals that Oceanic Trading Ltd. is on the OFAC Specially Designated Nationals (SDN) List, which means it is linked to terrorism financing.

3. Enhanced Due Diligence

The bank investigates further and confirms that Oceanic Trading Ltd. has ties to a government under international sanctions and is involved in illegal transactions.

4. Action Taken

XYZ Bank decides to reject the application and files a Suspicious Activity Report (SAR) with the authorities.

5. Outcome

After the report, authorities investigate and confirm that the company was involved in financing terrorism. The company’s executives are arrested for violating international laws.

Key Takeaways:

• The blacklist helped XYZ Bank identify a high-risk client and prevent it from being involved in criminal activities.
• By checking blacklists regularly, financial institutions can avoid illegal business relationships and stay compliant with AML laws.
• Enhanced Due Diligence (EDD) is crucial when suspicious activity is found.