Hi Sarah.
I just finally got the answer I was searching for with the help of an ABB support rep.
When cancellation doesn't fit their standards for a free cancellation, you're correct regarding incurring penalties.
But since we're talking about prospect tenants (our situations for 30+ day rentals in some states in the US exposes us hosts and the platform more to extensive damages & claims when tenants aren't properly screen), who by that point have read & acknowledged the booking requirements including a background check as a check-in prerequisite, & were to decide to not complete one, or the results red flagged them to be a risk to both hosts & platform; then having Airbnb review the situation for a cancellation COULD (not that it would) result in no penalty to the host.
Basically, as long as long as we're to involve Airbnb in the decision & provided them what's needed to justify it, such cancellation could be penalty free.
Ultimately our hope and goal is to not find ourselves needing to decline or cancel anyone's bookings.
🙂