Chapter 8 Quiz
Sanctions Screening: Watchlists, False Positives, and Calibration
20 questions. Answers follow.
1. OFAC's SDN List designation means:
A) The individual's transactions require enhanced due diligence before processing B) All property and interests in property of the designated person are blocked; US persons are generally prohibited from transacting with them C) The individual must provide additional identity documentation before any financial services can be provided D) The institution must file a SAR when a transaction is identified involving the designated person
2. The "OFAC 50% Rule" states that:
A) Institutions must screen at least 50% of all transactions against the SDN list B) Any entity that is 50% or more owned by a sanctioned person is itself subject to OFAC sanctions even if not named on any list C) OFAC penalties are calculated at 50% of the value of the violating transaction D) Voluntary self-disclosure reduces OFAC penalties by at least 50%
3. Post-Brexit, UK financial sanctions are:
A) Identical to EU sanctions because the UK agreed to maintain regulatory equivalence B) Administered by OFAC under a bilateral agreement with the United States C) Administered by OFSI/HM Treasury under the Sanctions and Anti-Money Laundering Act 2018, independent from the EU D) No longer enforced as the UK withdrew from international sanctions frameworks upon leaving the EU
4. Which matching algorithm would be MOST appropriate for matching "Ahmadinejad" (Persian name, Latin transliteration) against watchlist variants of the same name?
A) Exact matching only B) Levenshtein edit distance alone C) Soundex phonetic matching alone D) ML-based matching trained on name transliteration patterns, combined with edit distance
5. A sanctions screening system operates at a 0.85 similarity threshold and generates 2,000 alerts per month. Of these, 15 are confirmed true matches. The false positive rate is approximately:
A) 0.75% B) 7.5% C) 99.25% D) 92.5%
6. Which of the following is the MOST powerful single piece of supporting data for disambiguating a sanctions name match?
A) Customer's physical address B) Customer's employer C) Customer's date of birth D) Customer's account balance
7. A financial institution processes a wire transfer and the beneficiary name generates a HIGH-priority sanctions screening alert. The compliance analyst confirms it is a true match to the OFAC SDN list. The correct immediate action is to:
A) Process the wire transfer and file a SAR within 30 days B) Reject or block the transaction and report to OFAC within 10 business days C) Hold the transaction for 48 hours while seeking legal counsel, then process if no further guidance is received D) Request enhanced documentation from the customer before deciding whether to process
8. SWIFT message type MT103 is relevant to sanctions screening because:
A) It is the SWIFT format for sanctions list updates distributed to financial institutions B) It contains structured originator, beneficiary, and intermediary fields that must be screened before a wire transfer is executed C) It defines the mandatory fields for sanctions alert documentation D) It is the reporting format for voluntary OFAC self-disclosures
9. "Designation-triggered screening" refers to:
A) The process of screening customers who have been designated as high-risk in the institution's internal risk rating B) Re-screening the entire customer base when a new sanctions designation is published, to identify customers who match the new addition C) Automatically filing a regulatory report when a customer triggers more than three screening alerts in a month D) The process of designating specific screening rules to specific customer segments
10. The primary reason sanctions screening false positive rates are systematically higher than AML transaction monitoring false positive rates is:
A) Sanctions screening lists contain more entries than AML watchlists B) Sanctions screening systems use less sophisticated technology than AML monitoring C) Regulatory pressure to calibrate for maximum sensitivity, combined with the prevalence of common names on sanctions lists, makes conservative threshold-setting inevitable D) Sanctions screening is only performed monthly, giving more time for false positives to accumulate
11. Which of the following represents a demographic equity concern in sanctions screening?
A) Wealthy customers are disproportionately represented on the SDN list B) Customers with names from certain cultural backgrounds experience higher rates of false positive alerts due to name overlap with sanctioned individuals C) Domestic (US or UK) customers receive less rigorous screening than international customers D) Customers with common surnames are exempt from enhanced screening requirements
12. Which of the following is NOT one of OFAC's five essential components of a sanctions compliance program?
A) Management commitment B) Training for relevant personnel C) Mandatory third-party vendor audits of all screening technology D) Testing and auditing of controls
13. A bank maintains a "delta screening" process. This means:
A) Screening customers in batches organized alphabetically by last name B) Only screening high-risk customers on a daily basis while low-risk customers are screened monthly C) Identifying and alerting on matches that are newly present compared to the prior screening run, rather than re-generating all historical matches each time D) Screening only the delta (percentage change) of transaction amounts rather than total values
14. OFAC's record retention requirement for blocked transactions is:
A) One year B) Three years C) Five years D) Ten years
15. A bank's Soundex-based phonetic matching identifies "Kadafi" as matching "Gaddafi" on the sanctions list. This is an example of phonetic matching performing:
A) Incorrectly — these are different names and should not match B) Correctly — phonetic algorithms reduce variant transliterations to the same representation C) Inconsistently — phonetic matching should not be used for Arabic names D) Redundantly — exact matching would already catch this case
16. For payment screening in a real-time gross settlement (RTGS) system, the critical operational requirement is:
A) Screening must complete within 24 hours of the payment instruction B) Screening must be integrated into the payment processing chain before execution, typically completing in milliseconds to seconds C) Screening results must be reviewed by two analysts before the payment can be released D) Screening must be completed before the customer initiates the payment
17. An institution has the following policy: "Sanctions alerts with a name similarity score above 0.95 AND a date of birth match are automatically escalated to senior compliance without analyst pre-review." This represents:
A) A violation of regulatory expectations — all sanctions alerts must be reviewed by an analyst first B) A reasonable risk-based approach to prioritizing genuinely high-probability alerts for senior escalation C) An appropriate automation of the sanctions decision — alerts meeting these criteria can be auto-cleared D) An incomplete approach — only exact name matches should trigger senior escalation
18. Which of the following OFAC reporting obligations is correct following a voluntary block of a customer's funds?
A) Report within 24 hours to both OFAC and FinCEN simultaneously B) Report to OFAC within 10 business days of the blocking action C) No reporting is required if the block results from an internal compliance decision rather than an OFAC directive D) Annual consolidated reporting of all blocked funds
19. The extraterritorial reach of US OFAC sanctions affects non-US financial institutions primarily because:
A) OFAC directly regulates all financial institutions globally regardless of jurisdiction B) Non-US banks processing USD transactions through US correspondent banks are subject to OFAC compliance requirements C) Non-US banks must implement OFAC screening to maintain SWIFT membership D) The UN Security Council requires OFAC compliance as a condition of UN membership
20. Priya's sanctions screening calibration checklist includes testing the screening configuration against "a sample of known true matches." What is the purpose of this test?
A) To identify which customers are currently on the SDN list B) To verify that the matching threshold and algorithm settings would actually catch relevant sanctions designations — confirming the system's detection capability C) To ensure the system generates a sufficient volume of alerts for analyst training purposes D) To certify compliance with OFAC regulations for the annual regulatory examination
Answer Key
| Q | A | Explanation |
|---|---|---|
| 1 | B | SDN designation = blocking order. All property/interests are blocked; US persons prohibited from transacting. |
| 2 | B | The 50% Rule: entities 50%+ owned by sanctioned persons are subject to OFAC sanctions without needing to be named on any list. |
| 3 | C | Post-Brexit, UK sanctions are administered by OFSI under domestic UK law, independently from EU sanctions. |
| 4 | D | ML-based matching trained on transliteration patterns is the most effective for cross-script name variants. Edit distance and phonetic approaches are limited for non-English names. |
| 5 | C | False positive rate = (2,000 - 15) / 2,000 = 1,985/2,000 = 99.25%. |
| 6 | C | Date of birth is the most powerful disambiguation field. Address is useful but easily falsified; employer is not typically on watchlists; account balance is irrelevant. |
| 7 | B | True OFAC SDN match: reject or block immediately; report to OFAC within 10 business days. Processing the transaction would be a sanctions violation. |
| 8 | B | MT103 is the SWIFT payment message format containing structured fields for originator, beneficiary, and intermediary — these fields are screened in real-time payment processing. |
| 9 | B | Designation-triggered screening: re-screening the customer base when new OFAC/sanctions designations are published to catch existing customers who match the new addition. |
| 10 | C | Conservative threshold calibration (driven by catastrophic consequence of missed true match) + common name overlap = systematic high false positive rate. |
| 11 | B | Names common in Muslim-majority populations (Arabic, Persian, etc.) appear frequently on sanctions lists, creating disproportionate false positive rates for customers with those names. |
| 12 | C | OFAC's five components: management commitment, risk assessment, internal controls, testing/auditing, training. Mandatory third-party vendor audits are not a specified component. |
| 13 | C | Delta screening generates alerts only for newly appearing matches compared to the prior run, avoiding re-surfacing of previously reviewed and cleared ongoing matches. |
| 14 | C | OFAC requires five-year retention of records related to blocked transactions. |
| 15 | B | Phonetic algorithms are designed to match transliteration variants of the same underlying name — "Kadafi" / "Gaddafi" / "Qaddafi" are all transliterations of the same Libyan name. |
| 16 | B | Real-time payment screening must complete before the payment is executed — seconds at most, often milliseconds in high-throughput RTGS environments. |
| 17 | B | A risk-based approach to alert prioritization: automatically routing highest-probability matches (high name score + DOB match) directly to senior escalation is reasonable and efficient. Auto-clearing would not be appropriate. |
| 18 | B | OFAC requires blocked transaction reports within 10 business days of the blocking action. |
| 19 | B | USD transactions clearing through US correspondent banks create OFAC exposure for non-US institutions. Defying OFAC requirements risks losing access to the US correspondent banking system. |
| 20 | B | Threshold testing against known true matches validates that the screening configuration's sensitivity is sufficient to detect relevant designations — a fundamental control assurance step. |