Why is it hard to apply effective sanction controls?

Why is it hard to apply effective sanction controls?

Introduction

Many guidance's and recommendations have been published by global standard bodies to protect the financial system against money laundering and to combat terrorist financing. However, despite increased efforts and regimes, AML deficiencies and sanction control failures are ever more prevalent in Banks and Financial Institutions today.

What are sanction controls, why do we have them and who is involved in its implementation?

Financial sanctions are political trade tools adopted to pursue foreign policy intentions and national security objectives. There are various bodies and agencies involved in the construction and implementation of sanctions, such as the United Nations (UN) who have 14 on-going sanction regimes which member states are required to adhere to. “Specially Designated Nationals and Blocked Persons” and “Foreign Sanctions Evaders” are lists which are maintained by global ombudsmen such as OFAC. Persons or institutions found in breach of these controls are typically subject to great financial penalties. Many banks and financial institutions have been found to breach sanctions controls and have in turn, been subject to great fines. For example, in 2015 the United States Department of the Treasury’s Office of Foreign Assets Control (OFAC) fined Credit Agricole Corporate and Investment bank (CACIB) the sum of $329m as part of a $787m fine, following an investigation into sanction violations. The investigation concluded that CACIB had violated sanctions laws ‘knowingly and wilfully moving approximately $312 million through the U.S. financial system on behalf of sanctioned entities.

Why is it hard to apply effective sanction controls?

With consideration to the seriousness and importance of sanction controls, many banks have been found to be in breach of regulations. Whilst many may suggest harsher punishments and an increase in penalty charges, current mandatory and economic regulations are proving to be ineffective. The question is why? Why is it hard to apply effective sanction controls?  The answer; well there are many. For example, a lack of clarity and understanding often found in provisions, complex legal structures and systemic failures in screening.

In the aim to offer clearer guidance to firms of all sizes, The UK's Office of Financial Sanctions and Implementation Treasury (OFSI), has recently published guidance on sanctions, however, the guidance is general and an update and more guidance is still suggested and sought after.

A lack of transparency of some corporate structures and off-shore companies also poses a great risk as it can be difficult to obtain information to determine beneficiaries. This means that firms are not always aware of who their clients are or the risk that they pose. Screening and on-going monitoring are integral components for carrying out due diligence. In a fast-paced environment, company structures are constantly changing and failure to manage these changes put firms at risk. For example, in The UK - if updates to the HMT list are not quickly acted upon, relevant directors and shareholders are not screened. This can, therefore, increase the likelihood of a firm breaching UK financial sanctions by providing a service to a client before the appropriate screening has taken place.

How to apply effective Sanctions Controls

There are practices that firms can adapt to ensure more confidence and reduce these inadequacies:

  • Explore RegTech solutions that utilize artificial intelligence to tackle compliance-monitoring and mapping issues as well as sanctions screening limitations, to ensure that firms can enhance regulatory processes and deal with the rapidly-evolving regulatory changes.
  • Appropriate steps need to be taken by firms to increase awareness and ensure relevant staff are trained, aware and have a good understanding of sanction regimes and the firm's policies and procedures.
  • Regular procedural reviews need to be put in place to allow institutions to better allocate resources. Firms are encouraged to conduct reviews of their sanctions procedures and engage an independent person or third-party in internal audits.
  • Regular testing and review of sanction screening systems. In a fast-changing environment, it is important to monitor the performance of sanctions screening systems ensuring that they are effective, updated and fit for purpose.

 

Where Lysis can help

Here at Lysis Financial, we provide risk management frameworks for firms who are concerned about their exposure to risks involving Sanctions and Anti-Money Laundering. We offer thorough AML Health Checks to help assess your position and inefficiencies in your current processes.

If this is of interest to you, please contact info@lysisfinancial.com for more information.

 

[1] https://www.justice.gov/opa/pr/cr-dit-agricole-corporate-and-investment-bank-admits-sanctions-violations-agrees-forfeit-312