Watchlist Screening: Moving from Compliance to Competence

8th November 2025

Testing Sanctions and PEP Screening Solutions

Over the past few years, financial institutions have shown growing interest in testing the calibration of their sanctions screening systems. With the European Banking Authority (EBA) introducing mandatory testing and tuning of these systems effective 30 December 2025, the focus has shifted from passive compliance to active, demonstrable competence.

This regulatory change means institutions must ensure their governance, technology, and processes are not only fit for purpose but also aligned with regulatory expectations. Below is a roadmap to help you meet these requirements and strengthen your operational resilience.

A Practical Approach to Testing and Tuning

Sanctions screening is a cornerstone of financial crime compliance. Poorly calibrated systems can lead to two major risks:

• False negatives: Missing true matches, exposing the institution to regulatory penalties and reputational damage.
• False positives: Overwhelming staff with unnecessary alerts, increasing operational costs and the risk of overlooking genuine threats.

The EBA’s mandate emphasizes both accuracy and efficiency. Institutions must demonstrate that their systems can identify true matches while managing false positives effectively.

Review the Current State

Start by understanding your baseline:

• Systems in scope: Transaction screening, customer screening, and any other relevant tools.
• Configuration details: Matching logic, fuzzy matching parameters, watch lists, and alert handling rules.
• Governance: Who owns the system? Who reviews alerts? Is there a documented tuning policy?

A clear picture of your current setup is essential before making improvements.

Define Objectives and Scope

Ask: What does effective screening mean for our business?

• Align objectives with regulatory expectations and internal risk appetite.
• Define what success looks like—accuracy, efficiency, and scalability.
• Decide which components (e.g., matching algorithms, thresholds) will be tested.

Prepare a Robust Test Data Set

Testing requires realistic scenarios:

• Include known matches, known non-matches, and edge cases (e.g., transliterations, aliases, spelling variations).
• Use synthetic data or public sources like official sanction lists and the CIA World Leaders database.
• Consider leveraging AI tools to generate diverse test cases efficiently.

Execute the Testing

Run the test data through your screening system:

• Record all alerts—matches and non-matches.
• Compare actual results against expected outcomes.

This step provides the raw insights needed for calibration.

Analyze Results

Focus on:

• True matches: Confirm the system identifies them correctly.
• False negatives: Investigate why they were missed.
• False positives: Assess the volume and root causes.

Performance analysis should be tied back to your defined objectives.

Refine Configuration

Based on findings:

• Adjust matching logic, thresholds, and exclusion rules.
• Document the rationale for each change.
• Ensure all updates go through proper governance and approval channels.

Retest

Calibration is iterative:

• Expand the test set to cover new scenarios.
• Rerun tests to confirm improvements.
• Validate that changes haven’t introduced new issues.

Document Everything

Regulators expect transparency:

• Maintain a comprehensive audit trail—test plans, objectives, data sets, results, analysis, configuration changes, and outcomes.
• Ensure documentation is clear, structured, and demonstrable.

Key Takeaways

• Start now: The deadline is approaching, and preparation takes time.
• Think beyond compliance: Effective screening is about operational resilience and risk management.
• Leverage technology: AI and automation can streamline testing and tuning.
• Governance matters: Every change should be documented and approved.

Final Thought

The EBA’s mandate is not just a regulatory requirement, it’s an opportunity to strengthen your institution’s defenses against financial crime. By adopting a structured, proactive approach, you can turn compliance into a competitive advantage.