Top tips for firms complying with sanctions regulations

Sanctions and AML professionals have been in a tailspin this year. The sanctions environment has become much more challenging for banks and other financial institutions due to the war in the Ukraine and the ensuing sanctions against Russian organisations and individuals, contributing toward what was already a complex sanctions landscape.

Added to that is the FCA’s new reporting mechanism for sanctions and the introduction of their new sanctions testing capability being deployed across the financial services industry using their new analytics tool. The FCA and OFSI, as well as overseas sanctions regulators such as OFAC, have given financial institutions time to get used to the evolving sanctions regimes and will soon start cracking down. Woe betide the firms who haven’t got to grips with the new regime.  

In the blogs in this series, we have already talked about the range of sanctions and the challenges firms face in their ability to comply. Here we look at some of the key areas that your firm should focus on in how to approach sanctions programmes in the current climate.

• Perform a sanctions risk assessment: whilst most firms already have a risk assessment covering money laundering and other financial crimes, sanctions risk must be assessed as a separate category. A sanctions risk assessment allows you to identify your exposure to the risk of potential sanctions violations and forms the basis of a sound compliance programme, allowing you to design appropriate controls to mitigate these risks. This should be conducted regularly - annually at least – and when external drivers necessitate an update.

• Assess customer data quality: whether you are guilty of infringing sanctions regulations or not will more than likely be significantly affected by the quality of your customer data. If data is poor quality, it’s likely that sanctions ‘hits’ will be missed or you’ll generate way more false positives and you will need to go to greater lengths to optimise your sanctions screening tool to address this. Data should be stored in a consistent format, you need to ID missing fields, duplicates and inaccuracies and make efforts to resolve and remediate them.

• Identify Ultimate Beneficial Owners (UBOs): being able to identify the person(s) who is the beneficiary of a financial transaction or asset is vital in sanctions. It sounds relatively straightforward, but with the complexity of holding companies, complex global networks and opaque offshore legislation, it’s easier said than done. Firms need to collect information on customers (from registers, publicly available sources, third part information providers and the customer themselves) to enable them to look beyond legal ownership and understand who controls the customer.

• Independently test your sanctions screening solution: testing must be conducted on the operation of sanctions screening solutions to ensure they detect potential sanctions violations. Such testing should assess the configuration of the screening solution in terms of its effectiveness (does it pick up sanctions violations?) and efficiency (the proportion of false positives generated).  The use of independent, specialist sanctions testing can make the difference between compliance and looking down the barrel of hefty fines.

• Freeze sanctioned assets: measures must be put into place to enable the freezing of assets and blocking of accounts in instances where sanctions require this. For example, this needs to ensure that in real time, a firm is able to block funds from being passed through to (or from) sanctioned individuals or entities until potential violations of sanctions are checked.

• Training: stating the obvious, but staff need to be subject to an appropriate level of training depending on their roles and responsibilities. This should be up to date, factoring in latest international sanctions obligations.

It’s a tricky area. And financial institutions need to tread carefully in the coming months to ensure they’re complying to the domestic and international sanctions regime. The enormity of the task might seem overwhelming. But starting small and looking at key areas to improve will help firms to get to grips with sanctions and put the right procedures and policies in place to stay on top of this hugely complex area. 

If you want to learn more, please reach out at luke.firmin@valcon.com.