Sanctions and PEP screening is software that checks a customer's name against lists of people and organisations that a bank must not serve, and against lists of politically exposed persons. It is also called watchlist screening, or name screening. It runs when a customer is taken on, again whenever the lists change, and on many payments.
A sanctions list names people and companies that the law forbids banks to deal with, such as suspected terrorists. The United Nations Security Council keeps one such list. India's Ministry of Home Affairs keeps lists under the Unlawful Activities (Prevention) Act. Banks that send money abroad also check other countries' lists, such as the list kept by the US Treasury. A politically exposed person, or PEP, is someone with an important public job, such as a minister, a senior judge or a senior military officer. In India, the KYC rules of the Reserve Bank of India use this term for people who hold, or have held, such a job in a foreign country. The same checks also apply to a PEP's close family and close associates. A PEP is not banned. But a bank must check more carefully where a PEP's money comes from, because such a person has more chances to receive bribes.
The hard part is matching names. One name can be written in many ways: Muhammad can be spelt Mohammed or Mohd. Names are transliterated from other scripts, and the order of first name and surname differs. So the software uses fuzzy matching, which finds names that are similar, not only names that are identical. It gives each possible match a score. It also compares the date of birth, the nationality and other details, to rule out people who only share a name.
Here is a typical case. A small exporter of bicycle parts in Ludhiana opens a current account at a bank. The screening software checks the owner's name and finds two close matches. The first is a sanctioned person with a similar name, but born 31 years earlier, in another country. The second has the same name, but none of the other details match. The software clears both matches automatically, and records why. The account opens. Months later, the exporter sends a payment of ₹18 lakh to a buyer abroad. Before the payment leaves, the software screens the buyer's name and the buyer's bank too.
Most alerts are false. They are real customers who share a name with someone on a list. A large bank can receive thousands of such alerts a day, and an analyst must check each one. So reducing false alerts is the main goal of these products.
Screening is one step in KYC. It usually follows identity verification (IDV), which first confirms who the customer is. When the customer is a company, its owners and directors are screened too, as part of know your business (KYB). After the account opens, AML transaction monitoring watches what the customer does with it. A remittance app screens every sender and receiver of money sent abroad.