Webinar Masterclass: How to Build Best-in-Class AML Testing Programs
Most AML testing programs are designed for controlled conditions rather than the realities of day-to-day operations. On paper, they look solid. In practice, they miss where systems are most vulnerable: the lag between sanctions updates and system refreshes, broken data flows or threshold settings that become obsolete as customer demographics shift. Operational gaps like these cause compliance programs to collapse under regulatory scrutiny.
Our recent masterclass with AML testing experts Jose Caldera, CEO of Yanez Compliance, and Spencer Vuksic, VP of Growth at Castellum.AI, covered the drawbacks of current validation programs and provided a framework for building testing programs that ensure compliance systems work as intended: to identify and prevent financial crime.
Why most AML testing and validation programs fail
Testing failures aren't just operational hiccups. The breakdowns often occur in predictable (and preventable) areas.
Clean test data creates false confidence
Real customers provide transliterated names, incomplete addresses and partial information. If your validation scenarios don't reflect this messiness and actual risk patterns seen in the client/transaction data, you're testing against standards that don't exist in actual operations. The test results are more likely to be skewed and misleading.
When criminals use name reversals, first initials or geographic obfuscation, your testing must validate detection of these specific evasion patterns.
Lagging list update validations create compliance gaps
The absence of procedures to monitor whether your sanctions and financial crime risk data is fresh leads to critical compliance gaps and potential violations. Without real-time sanctions and risk data updates, a monitoring system, real-time payment services, operating via FedNow in the US or SEPA in the EU, become a compliance liability.
In a recent example, the EU issued sanctions on 15 July 2025 via the Official Journal. However, the consolidated sanctions list published by the EU was not updated until 31 July. If you rely on a data provider who only ingests the consolidated list, you might be vulnerable to critical regulatory risks.
Even short delays in data updates lead to violations. OFAC issued a finding of violation in 2022 against a bank because it processed transactions on behalf of designated parties within 90 minutes of sanctions being announced.
Rapidly changing regulations and list updates strain limited resources
Rapid and large changes to regulatory environments (such as the recent reimposition of sanctions on Iran) creates a compliance bottleneck. Teams scramble to recalibrate controls and thresholds while alert volumes surge. For businesses operating across jurisdictions, the burden grows as compliance staff must track regulatory changes and validate systems on a rolling basis. Every adjustment also requires detailed documentation for audit and regulatory reporting, leaving teams spending as much time on paperwork as on actual risk management.
Manual processes can’t scale
Manual testing consumes significant time and resources. Even though automation tools exist, many institutions remain reliant on outdated, manual workflows. In an environment defined by real-time payments and constant regulatory change, compliance teams simply can’t keep up, let alone support business growth, without the right technology and streamlined processes.
How to build an AML testing program that works
From focusing on business-relevant risks to performance benchmarking, testing should be continuous, grounded in real data and measured against clear standards.
Focus testing on high-impact, business-relevant scenarios
Start by aligning testing priorities with your internal BSA/AML and OFAC risk assessments. If you're serving customers from regions with heavy sanctions activity, such as Russia, Syria, Iran, your testing needs to reflect those specific name scripts, transliterations and evasion patterns.
Jose also emphasized a critical distinction most programs miss: Individual screening and entity screening require different approaches. Testing personal names against demographic data is straightforward. However, testing business entities means navigating complex ownership structures and identifying beneficial owners.
Integrate continuous validation into your operations
Periodic system validation or testing once a year isn't sufficient anymore. The rise of real-time payments demands real-time transaction and screening system validation. Your testing should continuously monitor:
List update integration: Are new sanctions designations or watchlist updates flowing through correctly? This is especially critical during sudden shifts—like the removal of certain Syria sanctions or the surge of Russia designations after the 2022 Ukraine invasion—where missing updates even for a short period can create major compliance gaps.
Data consistency: When you launch new products, add new jurisdictions to your business operations or change data flows, does your screening system still receive complete information?
Threshold performance: Are your above-the-line (ATL) and below-the-line (BTL) settings still appropriate as your customer base evolves?
Use realistic test data
Your test scenarios must reflect business reality, meaning datasets must include:
Name variations and typologies that match your actual customer demographics
Incomplete datasets that mirror real onboarding information and transaction patterns
Geographic and jurisdictional complexity that aligns with your risk exposure
Entity structures representative of your business customers
Set performance benchmarks
Make sure to establish a baseline for data validity and update frequency. Jose outlined several key areas institutions should evaluate when benchmarking their screening systems:
List update timeliness: Ensure the system always reflects the most current sanctions and watchlist data.
Coverage: Confirm the system uses the right lists across all jurisdictions and that the data extends beyond basic names to include identifiers such as date of birth, country, IP addresses or cryptocurrency wallets.
Fuzzy matching capability: Test how well the system handles variations in names, demographic details and incomplete attributes.
Accuracy: Verify that the system balances sensitivity with precision and doesn’t overwhelm teams with excessive false positives.
What types of transaction-level evasion should AML testing detect?
Panelists noted that sanctions evasion is increasingly happening at the transaction level, and both transaction monitoring and screening systems need effective controls to identify financial crime in real time. An effective testing program must account for the following:
Rapid ownership restructuring to avoid sanctions detection, such as sanctioned parties moving holdings to shell companies or family members
Geographic patterns where transaction volumes spike in neighboring countries after sanctions implementation
Name manipulation tactics, including first initial usage, name reversals and creative transliterations
IP address mismatches between stated customer locations and actual transaction origins
Banking-as-a-Service testing complexities
BaaS providers face unique challenges when testing transaction monitoring across multiple fintech partners. Banks often lack visibility into partner operations, making comprehensive validation difficult. Clear communication frameworks and tailored testing guidelines for each fintech partner are essential for an effective testing program.
Additional resource: Managing Banking-as-a-Service Third-Party Risk
Documentation standards for AML testing
Federal model validation frameworks, centered on the OCC 2011-12 model validation guidelines, also in use by the FRB and FDIC, expect three validation components:
Input validation: Document what data feeds your system, and how you verify its accuracy and completeness.
Processing validation: Show how you've tested your matching algorithms, threshold settings and filtering logic against realistic scenarios.
Output validation: Prove your system produces consistent, auditable results that align with your risk tolerance.
Beyond the basics: Document your design rationale, ongoing performance monitoring and actual outcomes analysis. This documentation standard applies across jurisdictions and forms the foundation for defensible validation programs.
Additional resource: Follow the OCC Comptroller’s Handbook for Model Risk Management for insight on how bank examiners review models.
Common pitfalls to avoid
Don't benchmark against OFAC's online tool. It's a reference tool, not a validation standard. Regulators don’t know this. Build your evidence base through comprehensive testing that mirrors your operational reality. Also, maintain detailed documentation of your screening system decisions and tuning parameters to preempt examiners using the OFAC tool as a validation standard.
Don't rely on outdated testing data. Regulatory environments change rapidly. Your test scenarios need to evolve with them.
Don't ignore the importance of unique, risk-based implementation. Even the most sophisticated, out-of-the-box screening systems require validation of your specific implementation. Compliance doesn't stop when you buy the technology, it starts there.
How to streamline ongoing testing and system validation
Every compliance team faces the same challenge: limited resources but unlimited regulatory expectations. You can't test everything perfectly, but you can test the right things consistently.
Begin by meeting the minimum testing requirements set by regulators and jurisdictional guidelines, then expand your coverage from there
Use technology to automate routine validation tasks like data freshness checks and threshold monitoring to free up analyst time
Focus manual efforts on high-risk, high-impact scenarios
Build testing requirements into vendor contracts and system implementations
The bottom line
Regulators expect institutions to find and fix compliance gaps before they do. The alternative—discovering problems through enforcement actions—carries financial and reputational costs that far exceed investment in robust testing systems.
Your testing program isn't just about checking boxes, it's about building confidence that your systems will perform when it matters. When sanctions hit in real-time and payments move in seconds, that confidence comes from continuous validation.
The technology exists to make this manageable for teams. Compliance leaders who adopt the right technology to move from reactive fixes to proactive validation will define the next era of AML resilience.