What Is Payment Screening: Process and Challenges

Undetected fraudulent payments and money laundering present major risks for many businesses and financial institutions globally. Every day, criminals find new ways to bypass existing security protocols and anti-crime measures.

Damages resulting from fraudulent online payments are projected to surpass $343 billion worldwide between 2023 and 2027, according to a report published by Mastercard. A rise in the risk of illegal activities like tax evasion, terrorism financing, and impersonation fraud also accompanies the ever-growing number of digital transactions every day.

Payment screening is a very important procedure that helps in identifying and stopping fraudulent activities before they take place. Payments are matched against global sanctions lists and PEP (Politically Exposed Person) databases along with specific risk indicators so that businesses can pre-emptively protect themselves, follow regulations, and foster trust among customers.

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What is payment screening?

Payment screening is a security procedure via which payment transactions are scanned for any suspicious elements before they are approved. If the system believes everything to be in order, the payment goes through. But if a payment is flagged as suspicious, it is flagged and either declined or investigated further.

The larger goal of payment screening is to prevent illegal activities, such as money laundering, fraud, and terrorism financing, and make sure that the payments are not of an unethical or criminal nature in any way and are not being used as tools to facilitate any crime.

For businesses, though, it’s not just about catching criminals; they need to protect their reputation, avoid potentially massive regulatory fines, and build and maintain a certain level of trust with their customers and partners.

Payment screening is a key pillar within the broader Anti-Money Laundering (AML) compliance framework. It works alongside transaction monitoring to offer multi-layered protection. Global regulators, such as the FATF, OFAC, and EU, require financial institutions and other industries to screen payments so that bad actors can be prevented from abusing financial networks for their own malicious and illicit gains.

Businesses failing to implement proper payment screening measures can face heavy fines, legal action, reputational damage, and other serious consequences.

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The role of financial institutions in implementing payment screening

Many different kinds of businesses, such as those from the fintech, eCommerce, or cryptocurrency spaces, and especially those who may be handling large or international payments, need to comply with payment screening regulations to protect themselves and their customers from financial crime and abuse.

However, financial institutions bear a heavier responsibility than all other types of organizations. As part of their AML compliance strategy, they must not only screen payments but also conduct due diligence on customers, verify identities, and monitor financial transactions over time to spot suspicious patterns.

And it’s not just about catching criminals – effective payment screening and regulatory compliance protects businesses, customers, and the broader financial ecosystem from becoming victims of fraud, money laundering, terrorist financing, or other crimes.

To achieve an effective screening process, though, organizations need to balance security with user experience. Overly strict screening can lead to false positives, a delay in the processing and approval of legitimate transactions, and, unfortunately, frustrated customers. On the other hand, an insufficient level of payment screening can result in false negatives, allowing fraudulent transactions to go undetected. Your payment screening mechanism should be robust enough to catch illegal activity but smooth enough that customers barely notice it working in the background.

To do this well, financial organizations must invest in cutting-edge technologies like AI-driven screening tools that can quickly flag threats without slowing down operations. It’s also critical to stay ahead of the latest security threats. This requires financial firms to keep their screening algorithms and practices up to date, which can be easier to do when supported by relevant tech and tools.

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Key components of the payment screening process

There are seven key components that form an effective payment screening system. Let’s briefly discuss each part of the process and how it works.

1. Data collection and verification

The first step of the payment screening process is concerned with collecting data about the payment and the parties involved in it. This could include personal and financial data, like names, addresses, ID details, origin of funds, and specific transaction details. The collected data is then checked for factual accuracy and legitimacy. Fake or suspicious details are flagged.

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2. Sanctions and watchlists screening

Sanctions screening is a key step in all payment screening processes. It requires cross-checking the transacting parties against global watchlists issued and maintained by regulatory bodies. These databases contain the names of persons, entities, or even entire countries that are not permitted to carry out any financial dealings within a certain jurisdiction due to a history of criminal acts, inciting violence and terrorism, infringing on human rights, or breaking other international laws.

Watchlists commonly referenced include OFAC’s Specially Designated Nationals (SDN) list of individuals and businesses that are subject to economic sanctions and the EU and UN sanctions lists of persons, entities, and countries that face trade and financial sanctions due to security reasons.

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3. PEP screening

A Politically Exposed Person (PEP) is someone in a prominent public role or having significant political influence due to which they may be considered high-risk. This is because their positions open up access to large amounts of funds and, thus, put them at a high risk for bribery, theft, corruption, fraud, embezzlement, or other financial crimes.

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4. Risk scoring and assessment

There are different levels of risk associated with different payment transactions. Here are some examples of payments that might raise red flags.

• Unusually large sums of money being moved between accounts
• A payment made to someone living in a country where money laundering or terrorist financing activities are common
• Making a series of payments within a short interval of time
• Splitting or “structuring” a large amount into smaller partial payments to avoid triggering detection limits

Determining the risk level is a payment screening system’s primary purpose. The system assigns a risk score to each payment. Payments with risk scores that go above a certain threshold are either forwarded for further investigation or declined right away.

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5. Real-time monitoring

In the modern payments landscape, delays in detecting suspicious activity could be disastrous. Modern payment screening systems use AI and ML powered AML algorithms and smart triggers that learn, react, and adapt to transaction patterns in real time. For example, if a customer suddenly tries to make a payment to a high-risk country, the system will pick this up as unusual behavior and flag the payment for review.

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6. Escalation and reporting protocols

Suspicious activities can be dangerous and should be reported right away to relevant authorities. Therefore, when a suspicious transaction is spotted, the case needs to be forwarded to someone who can take a closer look at it. This can either be a human being, such as a compliance officer, or another digital or automated system. Most financial institutions have compliance teams who manually review these transactions, trying to evaluate whether they were actually high-risk or not.

Accounts that are flagged can sometimes be put on hold during ongoing investigations. This ensures that the damage caused by that account can be contained as much as possible.

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7. Audit trails and record-keeping

If you want to optimize your internal operations and also stay prepared for AML audits, you must maintain detailed records of the entire payment screening process, the ins and outs of the system, and every transaction, outcome, and escalation.

These records are invaluable for compliance purposes – they demonstrate that the institution has followed proper procedures and can provide a detailed report if requested by regulators. Plus, you can also use these records to refine your screening processes in the future.

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Payment screening vs transaction monitoring

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Challenges in the payment screening process

Despite its importance in the AML compliance ecosystem, payment screening comes with several challenges.

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Managing false positives and negatives

Overly sensitive algorithms can end up flagging legit transactions, causing delays that frustrate customers and may cause you significant revenue losses. When too many false positives are triggered, it can burden your compliance teams with manual reviews, which is not very efficient. The challenge lies in getting the screening parameters just right.

Machine learning offers a way to reduce false positives and negatives by analyzing past data to improve accuracy over time. But regular testing and optimization are also essential to keep your payment screening process accurate and efficient.

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Data quality and inconsistency

Inaccurate or incomplete data can render even the most advanced and intelligent payment screening systems ineffective. You could end up with too many false positives or, worse, missed threats. This can be tackled by integrating multiple data sources to create a unified and more reliable framework.

But that comes with its own challenge – data protection regulations like GDPR require you to process sensitive and private information legally and securely. Violating data privacy laws can also result in hefty penalties.

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Keeping up with regulatory changes

Sanctions lists, AML rules, and compliance requirements evolve frequently, making it difficult for businesses to stay up to date constantly. On top of that, if your business operates globally, it becomes even more challenging to keep up with laws varying across jurisdictions.

Failing to stay updated can lead to heavy fines, legal action, reputational damage, or all three! To manage this, many businesses partner with legal or regtech experts or compliance providers who offer real-time updates and tailored compliance solutions. Regular staff training helps further.

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Cost and resource constraints

Implementing and maintaining an effective payment screening process can be costly, requiring advanced technology and skilled compliance professionals. It can be difficult – but not impossible! – to find a screening system that fits within budget without compromising effectiveness. You just need to strategize carefully. Invest in a scalable solution, automate repetitive tasks where possible, and make sure you have the right mix of human and technological help.

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Wrapping up

Protecting businesses and their customers from financial threats and major crimes like fraud, money laundering, and sanctions violations starts with effective payment screening. But the process comes with its own challenges, from managing false positives to keeping up with constantly changing regulations, which require careful planning.

By combining advanced screening tools and technologies with proactive compliance strategies and expert knowledge, you can set up a payment screening system that offers maximum protection without slowing down legitimate payments.

Looking to strengthen your defenses even further? Vespia’s transaction monitoring solution seamlessly integrates into your operations to catch risks before they escalate. Secure your business today and stay one step ahead of financial crime.

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