Transaction Monitoring Watchlists and How to Keep Them Updated

Introduction: What Are Watchlists?

A watchlist is a broader, flexible list of individuals, entities, or countries that pose potential risks. Being on a watchlist doesn’t necessarily mean that an individual or entity is prohibited from transacting; instead, it signals that their transactions require monitoring for suspicious patterns, enhanced scrutiny or due diligence.

Categorizing Watchlists

Watchlists can be categorized based on their source, function, and the risk areas they cover, such as:

1. Sanctions Lists: These include individuals, organizations, and countries under sanctions from international bodies like the United Nations, the European Union, or government agencies such as the U.S. Treasury’s Office of Foreign Assets Control (OFAC). Any transactions involving entities on these lists might trigger additional steps, such as requiring more documentation or further investigation. However, if someone or an entity on a blacklist attempts to conduct a transaction, the system will block the transaction entirely, and the bank may take further action, such as freezing the account.
2. Politically Exposed Persons (PEPs): PEPs are individuals who hold prominent public positions, such as government officials, and pose a higher risk of being involved in corruption or financial crime. Transactions involving PEPs require enhanced scrutiny.
3. Adverse Media Lists: These lists contain entities that have been linked to negative news reports, often related to fraud, corruption, or other criminal activities. Monitoring transactions involving such individuals helps reduce reputational risks.
4. Internal Blacklists: Financial institutions also maintain internal watchlists of customers or entities that have been flagged for suspicious behaviour in the past.
5. Geographical Risk Lists: Some jurisdictions are more prone to financial crime, corruption, or terrorism. Financial institutions maintain lists of high-risk countries or regions to monitor transactions originating from or going to those areas.

Static vs Dynamic Watchlists

1. Static Watchlists:
   Definition: Static watchlists are relatively stable and are updated at fixed intervals. These could include regulatory sanctions lists, which are updated only when new information is made available by governing bodies.
   Examples: The UN sanctions list, OFAC list, and other official watchlists fall into this category. These are less frequently updated but are considered authoritative sources for institutions to comply with.
   
2. Dynamic Watchlists:
   Definition: Dynamic watch lists are customized and change frequently based on real-time intelligence, transaction history, and emerging threats. These lists are updated continuously and in response to new information from various sources, such as adverse media reports, new PEP designations, or internal investigations.
   Examples: Lists based on adverse media, suspicious activity reports (SARs), or ongoing internal and external investigations can change daily or even hourly, depending on the situation.

How to Update Watchlists

Keeping a watchlist updated is crucial for ensuring that transaction monitoring systems remain effective and do not lead to missed risks, regulatory violations, and reputational damages.

Here are some best practices for updating watchlists:

1. Automated Data Feeds: Automated solutions or feeds that integrate to have the most recent information with external data providers for sanctions, PEPs, and adverse media lists. Regularly syncing with government and third-party databases keeps the lists accurate and up to date.
2. Regular Manual Reviews: Periodic manual reviews help to assess the accuracy and relevance of watchlists and prevent identifying any false positives or outdated entries that need to be removed.
3. Real-Time Monitoring: In cases of dynamic watchlists, transaction monitoring systems can be linked to APIs that push updates in real time to your watchlists.
4. Collaboration with Regulators and Industry Peers: Regulatory bodies often release new guidelines or sanctions, and being part of industry collaborations ensures that the FI gets early access to these updates.
5. Internal Reporting Mechanisms: Ensure that internal teams such as compliance, fraud detection, and transaction monitoring teams can easily flag suspicious individuals or entities and can add them to a list.
6. Audit and Review Processes: Clear procedures for auditing and reviewing how watchlists are updated can help catch inefficiencies in the system, such as missed updates or duplicate entries, and improve the overall accuracy of the watchlist management process.

Conclusion

A well-maintained watchlist becomes essential to avoid regulatory penalties and reputational harm and in helping institutions detect, prevent, and respond to suspicious transactions before they can lead to broader financial crime issues.