Time for the most basic of basics: what are watchlists and why do people use them?
Watchlists are lists of people, places and things that could expose companies and other organizations to elevated financial, reputational and/or regulatory risk. Some lists are issued by official bodies, while others are assembled by commercial providers.
There are many ways to categorize the available lists but, at the most basic level, we can think of all watchlists as either economic sanctions lists or due diligence lists.
Economic sanctions lists are extensions of countries’ foreign policies. They are issued both by countries and by transnational organizations like the United Nations and the European Union. In some cases, sanctions lists are very general in nature, barring all economic activity with the sanctioned parties, while others are limited to specific types of transactions. For example, some of the listings on the SECO list used in Switzerland purely bar immigration by the named persons into Switzerland. And the lists issued by the Directorate of Defense Trade Controls (DTC), the Bureau of Industry and Security (BIS) and the Bureau of International Security and Non-proliferation cover only import/export transactions barring specific materials (generally munitions of various stripes and dual-use items).
Due Diligence Lists help firms identify parties who may represent increased regulatory, financial and/or reputational risk. These include, but are not limited to, the following:
- Lists of fugitives from justice sought by law enforcement agencies
- People or organizations have engaged in past or current money laundering, fraud or other financial crime
- People who have access to or control over large amounts of assets
- Cash-intensive businesses
- People implicated in criminal investigations
These lists are issued by both official sources, and compiled by commercial ones.
Most Wanted Lists are available from major law enforcement agencies, including the FBI, US Marshals, Interpol and the Central Bureau of Investigation in India.
A number of governments maintain lists of financial services firms operating without a license. In addition, there are lists of past fraudsters, money launderers and credit risks.
Lists of politically exposed persons (PEPs), including government officials and their relatives and associates, and financially exposed persons (FEPs), such as company comptrollers, are derived from public sources, but are compiled by third party providers. Because of their access to, and/or influence over, large amounts of assets, they pose a greater risk of being involved in financial crime.
Money service businesses, which include money transmitters and foreign exchange houses, in the US are supposed to be licensed in each state that they do business and registered with the Financial Crime Enforcement Network (FinCEN). Commercial providers provide a combined set of these lists.
Lastly, a number of commercial providers provide a compendium of negative news stories, which follow criminal investigations and prosecutions. While the courts may have a presumption of innocence, a firm must consider the possibility that the business relationship may be riskier to maintain than its revenue potential.