Payment Screening: What Is It, How It Works and Its Importance

With the rise of online transactions and real-time payments, the risk of fraudulent activity has surged, putting financial institutions and businesses in a constant battle to protect their customers and themselves. The Financial Action Task Force (FATF) estimates that two to five percent of global GDP, approximately $2 trillion, is laundered annually. 

Compliance with anti-money laundering (AML) regulations is now a legal obligation. Payment screening helps ensure transactions comply with AML laws and international sanctions, protecting financial institutions, fintechs, payment providers, and igaming companies from fines and legal issues. By analyzing transactions, payment screening identifies and prevents illicit activity, safeguarding businesses from reputational and legal risks.

What is Payment Screening?

Payment screening refers to the real-time process that occurs at the point of transaction – both incoming and outgoing – designed to prevent high-risk or prohibited payments from being processed. It involves comparing the details of a transaction against various sanctions lists, watchlists and other databases of high-risk entities before the transaction is completed.

This process is essential for maintaining compliance in an increasingly regulated financial landscape.

How Does the Payment Screening Process Work?

The payment screening process typically involves the following four steps:

1. Data Collection: The gathering of relevant information about the transaction and involved parties.
2. List Checking: Comparing information against core sanctions lists, such as the Office of Foreign Assets Control (OFAC) Consolidated List, OFAC’s Specially Designated Nationals (SDN) List, the European Union’s Consolidated List of Sanctions, the United Nations Security Council’s Consolidated List, and other local regulatory watchlists. While PEPs require enhanced due diligence, regulated entities typically don’t screen individual payments against PEP lists due to the risk of excessive false positives. Instead, PEP screening is conducted during customer onboarding and periodic reviews.
3. Alert Generation: If a match is found, an alert is generated for further investigation.
4. Investigation and Resolution: Trained personnel investigate the alert to determine if it’s a true match or a false positive. If a customer sending or receiving a payment does hit a sanctions list, regulated entities are required to file a Suspicious Activity Report (SAR) with the relevant authorities.

The Difference Between Payment Screening and Transaction Monitoring

While payment screening and transaction monitoring are often mentioned together, they serve different purposes within anti-fraud and compliance strategies. Payment screening is crucial for preventing individual high-risk transactions but doesn’t provide the broader view of customer behavior that transaction monitoring offers. As the first line of defense, payment screening aims to catch obvious risks at the point of transaction.

Transaction monitoring, on the other hand, provides a more comprehensive, behavior-based approach to detecting potential money laundering or fraudulent activities involving real-time and historical analysis of broader customer activity to identify anomalies.

Together, payment screening and transaction monitoring form a multi-layered approach to AML compliance and fraud prevention. Payment screening prevents immediate risks, and transaction monitoring identifies more subtle or longer-term patterns of suspicious activity that might not be apparent in any single transaction.

Why is Payment Screening Important?

Money laundering is a massive global issue, with the United Nations Office on Drugs and Crime estimating that 2-5% of the world’s GDP – approximately $2 trillion annually – is laundered through illegal channels.

Payment screening plays a critical role in helping financial institutions and regulated entities ensure that onboarded customers pass financial crime checks, ensuring ongoing regulatory compliance – helping entities meet AML obligations across various jurisdictions. It helps mitigate risk by identifying high-risk transactions to protect businesses from inadvertently facilitating illegal activities, and further, payment screening affords reputation protection by demonstrating due diligence in preventing financial crimes.

Payment Screening Challenges

Payment screening poses challenges like high costs, the need for specialized expertise, and integration difficulties. Managing false positives is a key issue, as overly sensitive screening increases costs and frustrates customers. Balancing thorough screening with a smooth user experience is crucial to avoid delays and dissatisfaction in legitimate transactions.

Another challenge involves staying ahead of changing regulatory requirements. Organizations must continuously update their screening processes and technology to adapt to regulatory changes. This demands ongoing investment in training, technology and process refinement, especially as organizations handle high transaction volumes that require significant computational resources. Keeping screening lists current with the latest sanctions information also adds to the resource burden, making the need for efficient and adaptable systems even more important.

Payment Screening Solutions

Advanced technologies are maturing payment screening, making it more efficient and effective. Both AI and machine learning play key roles in improving accuracy and reducing false positives, making sure that legitimate transactions are processed smoothly while suspicious activity is flagged for further investigation. Real-time screening speed allows businesses to review transactions as they occur, minimizing delays and supporting immediate action when necessary. Additionally, solutions today are better designed to integrate seamlessly with existing payment and business systems, making it easier for companies to adopt advanced tools without overhauling their infrastructure.

Strengthening Your Payment Screening Process

By systematically analyzing and verifying each transaction, businesses can comply with AML regulations and protect their reputation, build customer trust and mitigate financial risks. SEON offers an automated solution that integrates easily with existing systems using a single API. Leveraging advanced AI and machine learning technologies, SEON’s AML compliance solution assesses risk in real time and minimizes false positives, allowing businesses to focus on what matters most: secure, compliant transactions.

Sources:

•  United Nations Office on Drugs and Crime: Money Laundering