Sanctions screening in cross-border real-time payments is a critical compliance process that ensures transactions involving sanctioned entities are blocked. With instant payments becoming the norm, financial institutions face the dual challenge of meeting speed requirements (under 10 seconds in Europe) while avoiding compliance breaches. Here's how the EU, US, and UK approach this:
- EU: Focuses on customer-based screening, reducing false positives by up to 90%. Institutions must screen customers daily and adopt AI-driven systems. However, smaller firms face high costs, and gaps remain in handling payment references.
- US: Uses a risk-based approach, requiring constant updates to sanctions lists (over 3,000 updates in 2024). Automation is encouraged, but legacy systems and fragmented global regulations complicate compliance.
- UK: Enforces daily customer screening with strict oversight by the FCA. Advanced technologies like AI are promoted, but dual compliance with EU and UK rules increases operational burdens.
Each region balances speed and compliance differently, making it essential for payment providers to adopt tailored, tech-driven solutions to navigate these complex frameworks effectively.
Payment risk: anomaly detection and sanction screening
1. European Union's Instant Payment Regulation (IPR)
The European Union's Instant Payment Regulation (IPR) introduces a shift in how payment service providers (PSPs) handle sanctions screening for real-time payments. Instead of relying on the traditional transaction-based method, the regulation mandates a customer-focused approach.
Screening Type
The IPR explicitly prohibits transaction-based sanctions screening for payments within its scope. Instead, PSPs must assess whether their customers are subject to targeted financial sanctions by implementing a customer-based screening model. This adjustment not only simplifies the compliance process but also tackles the high rate of false positives - traditional methods can generate up to 90% false positives. By focusing on customers rather than individual transactions, the model allows for more efficient updates and supports automation, as outlined below.
Update Frequency
To remain compliant, PSPs are required to screen their customers against sanctions lists at least once a day. Additionally, they must perform immediate checks whenever new or amended EU financial sanctions are issued. This demands compliance systems capable of near real-time updates to reflect regulatory changes promptly.
Use of Automation and AI
The IPR is pushing European banks to embrace advanced technology. According to a survey by RedCompass Labs, many banks in the region plan to allocate between £1 million and £3 million towards technology upgrades to meet these requirements. Tools powered by artificial intelligence and machine learning can streamline the screening process, minimise redundant alerts, and enable teams to focus on genuine risks. Former EU Commissioner Mairead McGuinness highlighted the benefits of this approach, stating that it "will save money, while still ensuring maximum vigilance".
Regulatory Challenges
Despite its advantages, the IPR presents hurdles for PSPs, particularly smaller ones with limited budgets and resources. One notable challenge is the absence of clear guidance on handling sanctioned names found in payment references, leaving PSPs uncertain about how to address such cases. Additionally, reconciling the IPR's customer-based screening model with local anti-money laundering laws - which often require transaction-based screening - adds another layer of complexity. PSPs must also ensure compliance with non-EU sanctions, further complicating the regulatory landscape. Failure to comply can result in severe penalties, including fines of up to 10% of total annual net turnover for companies and at least £5 million for individuals. EU Member States have until 9th April 2025 to establish penalties for violations.
2. United States' OFAC Compliance Approach
The United States Office of Foreign Assets Control (OFAC) takes a distinct stance on sanctions screening for real-time payments, differing from the EU's customer-focused model. OFAC emphasises that compliance must never be compromised for the sake of speed, leaving financial institutions to tailor their screening processes based on their own risk evaluations.
Screening Type
OFAC advocates for a risk-based approach to screening, where financial institutions define their parameters according to customer behaviour and their specific risk exposure .
The regulator’s perspective on compliance is clear:
"Faster payments do not reduce sanctions compliance obligations."
This statement underscores that while institutions have flexibility in their methods, they cannot let the speed of payments justify a reduction in compliance standards.
Update Frequency
OFAC’s approach requires institutions to stay constantly updated with regulatory changes. In 2024 alone, OFAC updated its sanctions lists 3,000 times, averaging over eight updates per day. This demands near real-time implementation of changes and continuous monitoring of sanctions lists to ensure compliance. The sheer frequency of updates highlights the need for automation to keep up with regulatory demands.
Use of Automation and AI
OFAC encourages financial institutions to adopt advanced compliance technologies. These include artificial intelligence tools and systems that facilitate information-sharing between institutions to improve screening accuracy and reduce false positives.
Traditional rules-based systems, which generate a staggering 99.99% false positives, contribute to inefficiencies. False positives account for 90% to 95% of all anti-money laundering (AML) alerts, while global AML compliance costs exceed £140 billion annually.
OFAC acknowledges the role of technology in addressing these inefficiencies:
"Technology solutions for sanctions compliance, which have advanced significantly in recent years and become more scalable and accessible, can be leveraged to help mitigate a financial institution's sanctions risk, including with respect to instant payment systems."
Discussions now centre around the timing, scale, and practical implementation of these technologies.
Regulatory Challenges
US financial institutions face a host of challenges in managing real-time payments. Compliance teams must balance the need for rigorous screening with the speed required to meet instant payment deadlines, all while ensuring sanctions violations are not overlooked.
Data quality issues, such as incomplete counterparty details and transliteration errors, further complicate real-time processing. Cross-border payments add another layer of complexity, as fragmented enforcement lists and differing risk expectations across regions create a challenging environment. For instance, the EU alone has over 40 separate sanctions regimes.
Legacy systems, originally designed for batch processing and manual reviews, often fall short in handling the speed and volume of instant payments. The stakes are high: OFAC penalties more than doubled from 2021 to 2022, with 16 public enforcement actions issued in 2022 totalling £33.2 million across 11 sanctions programmes.
To navigate these challenges, OFAC recommends implementing comprehensive solutions, including real-time compliance checks before payment authorisation, automated data enrichment to enhance sanctions databases, and AI-powered tools to resolve low-risk alerts automatically. Additionally, real-time payments require systems capable of generating detailed logs and justifications for alerts at high speed, ensuring auditability.
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3. United Kingdom's FCA Framework
The Financial Conduct Authority (FCA) in the UK has taken a strict approach to combating financial crime, setting itself apart from practices in the EU and the US. The FCA mandates daily customer screening and enforces rigorous oversight to prevent financial crime, including the evasion of financial sanctions. Financial institutions are required to establish robust systems and controls, with clear accountability measures to ensure compliance.
Screening Type
Under the FCA framework, firms must carry out daily reviews of all Payment Service Users (PSUs) to ensure none are subject to financial sanctions. Unlike other jurisdictions, the UK prohibits transaction-based screening, focusing instead on regular, proactive checks. The FCA explains:
"We expect firms' systems and controls to mitigate the risk of financial crime including the risk of financial sanctions evasion."
Senior management plays a critical role in this process, overseeing sanctions compliance systems to guarantee that screening measures function effectively at every customer interaction point. This daily approach aligns the UK's practices with shifting international standards and highlights the growing importance of advanced screening technologies.
Update Frequency
In 2022, HM Treasury updated its sanctions list over 300 times. To keep pace, firms must establish clear Service Level Agreements (SLAs) for implementing changes and regularly test their screening systems to reduce the likelihood of false positives .
Use of Automation and AI
The FCA encourages the use of artificial intelligence (AI) to strengthen anti-money laundering (AML) efforts. Traditional compliance systems, which rely on static rules, often struggle with distinguishing between legitimate and suspicious activities, leading to high false positive rates and inefficiencies. In contrast, machine learning models excel at analysing large datasets, identifying patterns, and adapting to new threats. These systems can prioritise high-risk alerts more accurately, reducing both false positives and operational burdens.
AI is not about replacing human judgment but enhancing it. By late 2025, advancements in AI are expected to significantly improve alert precision while cutting down on manual effort. However, while technology offers exciting possibilities, the FCA's stringent regulatory framework ensures that compliance remains a challenging task for UK financial institutions.
Regulatory Challenges
UK financial institutions face increasing pressure from regulators like the FCA and the Office of Financial Sanctions Implementation (OFSI). Both bodies have ramped up enforcement actions against firms with inadequate financial crime controls or sanctions violations. Recent penalties imposed on Starling Bank and Metro Bank highlight the growing scrutiny. Common challenges include inconsistent sanctions list formats, limited resources, alert backlogs, and heavy reliance on third-party tools.
Reflecting on Starling Bank's failings, Therese Chambers of the FCA stated:
"Starling's financial sanction screening controls were shockingly lax. It left the financial system wide open to criminals and those subject to sanctions. It compounded this by failing to properly comply with FCA requirements it had agreed to, which were put in place to lower the risk of Starling facilitating financial crime."
The FCA has also raised concerns about challenger banks, citing issues like weak risk assessments, poorly designed policies, and inadequate testing protocols . To address these challenges, firms must ensure their compliance systems evolve in step with their growth and risk exposure. This involves continuous monitoring, regular audits, and sufficient investment in experienced personnel. These enforcement actions underline the UK's commitment to pairing rapid payment systems with strong sanctions compliance measures.
Advantages and Disadvantages
Here’s a closer look at the strengths and weaknesses of different regional approaches to sanctions screening, highlighting the trade-offs between compliance, efficiency, and cost that providers must navigate.
European Union's Instant Payment Regulation
The EU’s move to customer-based screening brings clear operational advantages. By focusing on customers rather than individual transactions, the Instant Payment Regulation (IPR) can reduce false positives by up to 90%. This means fewer unnecessary checks and more time for compliance teams to address actual risks.
"PSPs should periodically, and at least daily, verify whether their Payment Service Users (PSUs) are persons or entities subject to targeted financial restrictive measures."
Another benefit is the push for better customer data quality. With this approach, organisations are encouraged to keep client records accurate and up to date.
However, the IPR isn’t without its challenges. Smaller institutions often struggle with the costs of compliance. For example, a RedCompass Labs survey revealed that European banks expect to spend between €1 million and €3 million on new technology to meet IPR standards. Additionally, the regulation doesn’t address how to handle sanctioned names appearing in payment references, leaving a potential compliance gap.
United States' OFAC Framework
The US adopts a risk-based approach to compliance, offering institutions the flexibility to tailor their screening processes based on their specific risk profiles.
"Financial institutions are encouraged to adopt a risk-based approach to ensure their sanctions compliance controls and related technology solutions remain commensurate with the sanctions risks presented by instant payment systems."
This adaptability is particularly helpful for institutions with diverse risk exposures. However, it also requires organisations to set their own compliance standards, which can lead to inconsistencies if expertise is lacking. The risks of insufficient compliance are evident in cases like Binance’s US$4.4 billion penalty for repeated violations of US anti-money laundering and sanctions laws.
United Kingdom's FCA Framework
The UK mandates daily screening to ensure thorough and proactive risk management. This approach is bolstered by the use of advanced technologies like artificial intelligence and machine learning, which allow institutions to analyse large datasets, detect patterns, and respond to emerging threats. These tools help reduce false positives and streamline operations.
However, UK institutions face the added complexity of complying with both EU and UK sanctions requirements. This dual compliance creates extra operational burdens and increases costs.
Comparative Overview
The table below summarises the key differences in regional sanctions screening approaches:
| Aspect | EU (IPR) | US (OFAC) | UK (FCA) |
|---|---|---|---|
| Screening Method | Customer-based screening | Risk-based flexibility | Customer-based screening |
| Technology Investment | €1–3 million for compliance | Variable based on risk assessment | High due to advanced technology |
| False Positive Reduction | Up to 90% reduction | Depends on implementation | Significant via AI/ML tools |
| Implementation Complexity | High for smaller PSPs | Moderate with interpretation burdens | Very high due to dual compliance |
| Enforcement Approach | Fines up to 10% of annual turnover | Case-by-case penalties | Strict enforcement |
| Regulatory Updates | Periodic list changes | OFAC list updates | Frequent updates |
The Financial Action Task Force reports that over 99.9% of sanctions checks result in false positives, leading to delays and higher costs across jurisdictions. This highlights the growing importance of customer-level screening, as adopted by both the EU and the UK, to improve compliance processes.
Each region’s approach reflects its unique priorities and market conditions. The EU focuses on harmonisation, the US values flexibility, and the UK combines strict oversight with advanced technology. Payment service providers must weigh these trade-offs carefully when crafting cross-border compliance strategies.
Conclusion
When it comes to sanctions screening in cross-border real-time payments, the regulatory landscape is shaped by three distinct regional approaches. The EU focuses on customer-based screening to enhance efficiency and uniformity. The US prefers a risk-based framework, while the UK enforces daily checks under the Financial Conduct Authority (FCA) guidelines. These variations create operational hurdles, where compliance must be swift yet precise.
For cross-border payment providers, balancing speed with rigorous compliance is no small feat. High transaction volumes and the growing threat of Anti-Money Laundering (AML) penalties amplify the pressure. In fact, global AML-related fines have surged by an astonishing 522%, reaching approximately £2.9 billion in 2024. Banks operating across multiple jurisdictions must also contend with conflicting sanctions rules from the US, EU, and UK. Adding to this complexity, the requirement for instant payments to settle within 10 seconds leaves little room for traditional screening methods.
To navigate these challenges, effective sanctions screening calls for smart, tech-driven compliance strategies. Leveraging AI-powered automation and real-time risk detection can help meet regional regulatory demands without sacrificing speed. Notably, the Financial Action Task Force (FATF) reports that over 99.9% of cross-border transaction checks result in false positives, highlighting the pressing need for more intelligent screening solutions.
Providers like Oku Markets (https://okumarkets.com) offer tailored compliance tools and expert advice, streamlining the complexities of cross-border payments. As Former EU Commissioner Mairead McGuinness aptly remarked:
"will save money, while still ensuring maximum vigilance"
Ultimately, achieving the ideal balance between efficiency and compliance is essential for the future of sanctions screening. By combining advanced technology, deep expertise, and personalised solutions, organisations can ensure secure and reliable international transactions.
In this ever-changing regulatory environment, success hinges on more than just understanding the rules. It requires the ability to implement them effectively across jurisdictions, all while meeting the speed and reliability demanded by today’s fast-paced business world.
FAQs
How do banks ensure sanctions compliance without slowing down cross-border real-time payments?
Banks manage to keep cross-border real-time payments both swift and compliant by using advanced sanctions screening systems. These systems rely on real-time data, machine learning, and complex algorithms to flag potential risks quickly while keeping false positives to a minimum.
By automating the screening process and frequently updating sanctions lists, financial institutions handle large transaction volumes efficiently without neglecting regulatory obligations. This method ensures payments stay quick and smooth, all while meeting strict global compliance rules.
What challenges do smaller financial institutions face in complying with the EU's Instant Payment Regulation?
Smaller financial institutions face tough challenges when trying to comply with the EU's Instant Payment Regulation. One major issue is dealing with technological hurdles, like updating old legacy systems to handle real-time payments effectively. This kind of upgrade can be both complex and costly.
Another pressing concern is managing liquidity risks, as these institutions need to guarantee that funds are instantly available for transactions. On top of that, they must revamp their customer-facing systems to include real-time sanctions screening and implement strong fraud prevention measures. These adjustments often demand significant resources and specialised skills, putting additional strain on their operations. Striking the right balance between staying compliant and maintaining smooth operations remains a major challenge for smaller financial firms.
How do AI and automation enhance sanctions screening in cross-border real-time payments?
AI and automation have become essential in enhancing sanctions screening for cross-border real-time payments. These technologies allow for real-time transaction monitoring, ensuring that payments comply with global regulations in mere seconds. By handling large transaction volumes efficiently, they help financial institutions navigate the increasingly complex world of international sanctions.
AI systems also improve accuracy and efficiency by constantly updating and cross-referencing various sanctions lists. This significantly reduces false positives, uncovers evasion attempts, and minimises the likelihood of manual errors. The result? Lower operational costs, reduced regulatory risks, and smoother compliance processes. In today’s fast-moving financial environment, these tools are proving indispensable.
