7 best practices for an effective payment screening process

Payment screening is crucial to any financial institution’s (FI) anti-money laundering and countering the financing of terrorism (AML/CFT) compliance program. But when a major social media platform makes headlines for alleged screening failures or a major FI receives a substantial regulatory fine for similar reasons, it shows that even established firms are not immune to flaws in their payment screening processes. To avoid the consequences of regulatory non-compliance, all businesses should ensure robust implementation and oversight of their payment screening solution. 

Payment screening involves analyzing a transaction for signs of criminal activity. An effective payment screening process will assess the risk level of any transaction by considering whether its value and destination represent normal financial behavior for the customer in question. It will also identify the involvement of any sanctioned or watchlisted entities or politically exposed persons (PEPs). Any red flags mean the payment can either be blocked or escalated for further review by an FI’s compliance team and reported to the relevant authorities if necessary. 

Unlike transaction monitoring, which analyzes transactions after the fact to detect underlying patterns that may indicate suspicious behavior, payment screening identifies red flags before transactions are processed, allowing financial institutions to stop them going through. 

The importance of effective payment screening 

Without a successful payment screening process in place, FIs expose themselves to the risks of money laundering and terrorist financing. On the one hand, these risks can be reputational, with firms associated with poor defenses against financial crime likely to lose customers and see business growth suffer. Some research suggests one negative article can cost businesses up to 22 percent of potential customers, a figure that increases to 70 percent with four or more articles. 

On the other hand, the risks can be financial or criminal. Regulators worldwide have implemented legislation governing payments, often stipulating payment screening requirements, with non-compliance resulting in heavy fines or law enforcement action. Key global pieces of payments legislation are: 

• The Payment Services Regulations 2017 (PSRs) in the UK. 
• The Electronic Fund Transfer Act (EFTA) in the US. 
• The revised Payment Services Directive (PSD2) in the EU. 

Common challenges in payment screening 

The essential challenge FIs face in payment screening is balancing customer experience with regulatory obligations. In a world of instant payments, customers expect seamless interactions with their bank or payment service provider (PSP) and transactions to be processed without delay. In the European Union, the SEPA Instant Credit Transfer scheme provides for instant cross-border payments, with instant payments projected to grow to €34.2 billion by 2027. When firms fail to implement efficient screening measures or experience high rates of false positives in their screening process, this inhibits their ability to deliver satisfactory customer experiences. 

Another common issue for firms is adapting to changing regulations and sanctions lists. In the current sanctions environment, which has seen a spike in new designations since Russia invaded Ukraine in 2022, firms need to be able to access the latest sanctions updates. 

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7 ways to enhance your payment screening process

Regulatory feedback for firms guilty of payment screening failures has emphasized the importance of adapting compliance programs to match business growth, ensuring they remain fit for purpose at all times. Here are seven important steps that allow firms to do this: 

1. Implement a risk-based approach

As a foundational point of AML compliance, the risk-based approach will be familiar to experienced compliance professionals. However, all firms should still ensure their approach is as efficient as possible by avoiding standardized, inflexible rules, instead undertaking regular business-wide risk assessments to identify which products or services, customers, and jurisdictions are likely to pose the highest AML/CFT risk. Firms should also have clear policies specifying when cases should be escalated for further review and when enhanced due diligence (EDD) is required. In practice, a risk-based approach could mean, for example, that firms screen transactions in different payment corridors against different datasets or apply variable levels of fuzziness in searches. 

2. Use comprehensive data sources 

Firms should screen payments against all relevant data from jurisdictions in which they operate or have significant interests. This involves checking sanctions lists maintained by governments and regulators, various adverse media sources (including both traditional and informal sources like social media), and global PEP databases. 

3. Receive updates in real-time

Access to a range of screening lists is important – but these lists will only be effective if updated frequently. Major sanctions lists, for example, often receive multiple weekly or even daily updates. Using old data means firms can take on more risk than they have planned by processing transactions that should have been flagged as high-risk. Outdated information can also cause false positives, slowing firms’ operations. For an optimal solution, firms should look for ways to receive updates to customer data in near-real time, allowing them to mitigate risks as quickly as possible. 

4. Conduct ongoing transaction monitoring

In addition to detecting the presence of high-risk parties in customer transactions, payment screening must also involve determining whether an individual customer payment deviates from how firms should expect that customer to behave. This can only be done by monitoring transactions on an ongoing basis so firms have existing records with which to compare a given payment. This allows firms to establish customer behavior patterns and flag any departures from them. Centralizing compliance activities within a single platform allows firms to integrate payment screening with transaction monitoring more efficiently and reduces the need for analysts to switch between siloed datasets and cases. 

“As a cross-border payments firm, we really value ComplyAdvantage’s payment screening solution, which was a game changer for us, allowing us to centralize our payment screening and transaction monitoring activities within one team connected to one system.”

Alessio Giorgi, Head of Compliance & MLRO, Lumon 

5. Balance security measures with user experience

On the customer side, FIs must be able to collect the information necessary to process and authenticate the payment. This may include two-factor authentication to verify customer credentials. The mechanics of this process mustn’t be lengthy or complicated enough to deter customers from proceeding with the transaction. 

Firms then need to screen the payment against the customer’s transaction history to determine whether it’s a payment they would be expected to make and screen all parties in the transaction against sanctions, PEP lists, and adverse media databases. Ideally, this should all happen within milliseconds. 

On the compliance side, an FI’s chosen payment screening solution should have an easy-to-navigate user interface (UI). Ideally, it will be easy to integrate with the firm’s existing tech stack and databases, reducing the possibility of siloed datasets and a difficult implementation process. Features such as alert prioritization and case management also improve the usability of a screening solution. 

6. Maintain clear documentation 

Regulators and auditors have high expectations of firms when it comes to record-keeping. In the event of a review, they will expect thorough documentation not only of payment screening policies and procedures but also of every decision made regarding escalated or reported transactions. Without proper attention from firms, this critical aspect of compliance can fall by the wayside, especially given the competing pressure of delivering instant payments to customers. Firms should ensure records are retained and stored accessibly to make themselves as auditable as possible. 

7. Use advanced technology to enhance screening accuracy 

Dedicated AML software leveraging cutting-edge technology can offer firms a significant competitive advantage in payment screening. Artificial intelligence (AI) and machine learning (ML), in particular, have a wide range of applications in this area, from automatically refreshing screening databases to optimizing search algorithms for a reduced false positive rate. When choosing a software solution, firms should consider their specific payment screening requirements, risk assessment, and appetite.

Automated solutions for seamless payment screening

ComplyAdvantage’s advanced payment screening solution is designed to let firms provide their customers with the best experience possible while managing AML/CFT risks. With ComplyAdvantage, firms looking to upgrade their payment screening can: 

• Cut down on false positives with risk-optimized matching algorithms and data sourced straight from regulators with natural language processing technology. 
• Process 99 percent of payments in less than half a second, supporting instant payments without compromising on risk with scalable cloud technology. 
• Receive updates to sanctions lists in under an hour, with databases refreshed using automated systems and validated by human experts. 
• Improve efficiency with integrated data, screening, and case management. 
• Customize screening processes by applying tailored lists and fuzziness levels to different payment corridors for an effective risk-based approach.