legal consequences for banks for sanctions violations.

Sanctions 101: How an FI can prevent sanctions violations

Sanctions compliance, an essential aspect of anti-money laundering (AML) programs, challenges financial institutions (FIs) to do more than know their customers; they must trust them. Or, at the very least, understand and accept the risk each and every customer poses. It’s no easy feat. There are real consequences for sanctions violations: punitive fines, criminal charges, reputational damage, and the knowledge that you may have aided and abetted a terrorist, slave trafficker, or drug lord.

With so much on the line, it’s vital that compliance and AML teams have a solid understanding of all things sanctions, and that FIs have a plan for how to meet sanctions obligations, even as sanctions lists and laws change and evolve.

Let’s take a closer look at what sanctions are and how FIs can meet their sanctions obligations.

What are sanctions, and why do governments impose them?

National and international bodies impose sanctions that primarily focus on stopping terrorism, illegal drugs, conflicts, weapons of mass destruction, and harm, including human rights abuses.

Financial sanctions are a preferred tool to pursue specific objectives to combat terrorism and include:

  • Asset freezing, which prevents funds or economic resources (which may belong to/be owned or controlled by a designated person or entity) from being directly or indirectly available to the designated person; it is a criminal offense to facilitate this activity.
  • Prohibitions of investments/providing economic benefit/unlicensed financial services to designated persons; licenses are required to carry out services and activities that are otherwise prohibited.

Governments and international authorities will typically issue laws and regulations to create restrictions to pursue the objectives outlined above. They are used to:

  • Change the behavior of a targeted country, region, or regime.
  • Act as an enforcement tool when international peace and security have been threatened, and diplomatic efforts have failed.
  • Restrict the funding of individuals, entities, or groups associated with criminal or terrorist activity.

Who can be sanctioned?

Authorities issue sanctions against individuals, countries, jurisdictions, or regions. They can also be issued against trading activities such as certain goods, services, and technologies. For example, there is an internationally established Sectoral Sanctions Identification (SSI) List prohibiting certain types of debt financing and equity, in response to Russia’s annexation of parts of Ukraine.

What are the most relevant types of sanctions banks and FIs need to be aware of?

Governments across the world use sanctions to restrict or prohibit trade or movement. Sanctions can take numerous forms. The two most relevant types of sanctions FIs should be aware of are:

  1. Economic sanctions. Governments prohibit FIs from transacting with persons, organizations, or governments. The economic sanction can be comprehensive, forbidding any transactions with an entire country, or specific, targeting a particular person or entity.
  2. Trade sanctions. These are laws that forbid, suspend, or end trade with a particular country.

How do sanctions affect banks?

Laws forbid banks, FIs, and payment services from conducting any business with individuals, entities, countries, regions, or activities subject to sanctions. It’s not enough for FIs to ensure that account holders are not on sanctions lists at the time they open an account. FIs must also verify that account holders are not on sanctions lists in real-time for each transaction. They must also ensure that their accounts do not make ANY payments to those on sanctions lists. This is illegal and banks can face big fines if they miss something.

Firms must also establish controls through a program of detection and appropriate action to avoid risks, or mitigate the effects of those that materialize, in line with regulatory obligations and industry best practice. These controls should apply to both international and domestic sanctions regimes.

For example, let’s say a South African bank provides international payments for an account holder that does business in the UK and the US. The South African bank would need to consider sanctions lists from the UN, US, UK, and EU to comply with minimum sanctions requirements.

If this sounds like a lot, you’re right! And there’s even more. Typically the UN, EU, and US programs have more than 100 updates per year. A single update may contain many new entities and cover more than one sanctions program (e.g. DPRK, Cuba, Proliferation, etc.).

How can FIs stay ahead of sanctions obligations?

I spoke with Neil Whiley, Director of Sanctions at UK Finance in advance of this article, and he kindly provided a lot of detail, including what Financial institutions must do to develop, implement, and routinely update risk-based sanctions compliance programs.

To ensure a robust sanctions compliance control framework, Whiley said firms should:

  • Understand the products and services they offer;
  • Identify areas where they may be vulnerable to sanctions breaches;
  • Put controls in place to mitigate these risks;
  • Have effective systems and controls in place to ensure that they meet requirements in all their operating jurisdictions.

Putting it all together: Cynergy Bank vs. Lamesa, a real-world sanctions study

To fully appreciate the seriousness of sanctions screening compliance, let’s look at a current case making its way through the UK’s courts: Cynergy Bank vs. Lamesa Investments.

Cynergy Bank borrowed investment money, a mere £30m, from Lamesa Investments, a company based in Cyprus and owned by an individual who was subsequently sanctioned by the US.

When Cynergy implemented a screening tool (with the money it borrowed from Lamesa), it learned that Lamesa’s Beneficial Owner was a Russian national on the US sanctions list. If the bank made the loan payment to Lamesa, they would not comply with AML sanctions screening requirements. To remain in compliance, they did not make their loan payment but instead put the money in a suspense account until such time as the sanctions restriction did not apply (the lists change frequently). Lamesa sued them, noting jurisdiction was the US and the bank loan was in UK sterling. On June 30, the Court of Appeal ruled in favor of Cynergy Bank, and the case will now go to the UK Supreme Court.

The ultimate lesson here is simple: it’s not just individuals that FIs have to screen for sanctions matches. They must also screen the ultimate beneficial owners, vendors, and even their own employees! Further, FIs can’t just screen at the onboarding stage. They must screen every payment and regularly check for updates across a lot of lists.

 

Want to learn more about fighting financial crime? Watch Fighting Fincrime: What Do Disrupted Times do to Established Strategies?

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