Compliance Officers: What to Know About Enforcing Sanctions against Entities & Individuals

Sanctions Compliance

Economic sanctions have been the main “stick” typically used by a community of nations to deter a specific nation’s condemned moves and/or policies, whether played out on either the domestic or international scene, or both. In the past, total embargoes were common and were embraced as a measure to wholly block trade with countries that fell out of favour.

In recent times, list-based sanctions—otherwise known as ‘smart’ sanctions—have become the determent tool of choice. These specifically target entities and individuals rather than whole nations. Many observers agree that list-based sanctions trigger fewer collateral consequences than embargoes and, because of this, they are well worth implementing.

Regarding Current EU Sanctions Against Russia and Belarus Over the Invasion of Ukraine

Having recently passed the first and second sanctions package against Russia and Belarus over their invasion of the Ukraine, the European Commission and the Council of the EU are closely working together to adopt even more sanctions against the two Eurasian countries in order to force Russian President Vladimir Putin to order a ceasefire. Some of the EU’s allies, like the US’s Office of Foreign Assets Control (OFAC), have also signalled they are doing the same.

The EU sanctions approved against Russia and Belarus are the most severe and largest restrictive measures ever approved by the European body. The measures specifically aim to weaken the economies of Russia and Belarus by restricting the financial flows benefiting the two countries; the idea is to send a clear message to Putin, his inner circle, and their followers. As of late-March 2022, the sanctions apply to a total of 877 individuals and 62 entities.

Restrictive EU sanctions work to fulfil the objectives of the Common Foreign and Security Policy (CFSP). The sanctions can include funds freezing and bans on travel but must be unanimously approved by the CFSP Council. Once informed of the restrictions, any individual and entity targeted by the EU sanctions can challenge the same before the General Court of the EU. Russia and Belarus are set to challenge the sanctions.

A difficult question the EU is facing is whether to ban the imports of oil and gas from Russia. Member States appear divided on the question and seem unlikely to go along with such restrictions already approved by the US and UK. Pacifist observers, however, note that such an EU-approved ban would be in keeping with the spirit of a European Commission plan to phase out a dependency on Russian fossil fuels within the next five to eight years.

At present, the EU, along with the US and G7 partners, are looking to terminate Russia’s Most Favoured Nation (MFN) status at the World Trade Organisation (WTO), which could lead to higher import duties for Russian exported goods. EU leaders are also blocking International Monetary Fund (IMF) and World Bank funding for the Putin-led nation and Belarus.

Sanctions Objectives

Compliance Objectives When Implementing Sanctions

Most companies use automated sanctions screening tools to identify potential matches of sanctioned individuals found among their account databases.

In a bid to make the capabilities of the overall sanctions compliance programme effective, compliance officers must enact proper oversight; clearly map between the sanctions screening framework and relevant sanctions risks for the company; and review these regularly so that results are always efficient, accurate, and complete.

Problems in Enforcing Sanctions for a Compliance Officer

Enforcing sanctions lead to the following problems for any compliance officer:

  1. Targeting and finding sanctioned parties who hide behind complex corporate structures.
  2. Identifying the right individuals through name matching.
  3. General screening difficulties.

In the United Kingdom, according to the Financial Conduct Authority’s (FCA) Financial Crime Guide, when risk is assessed, a firm seeking compliance should identify where sanctions risks reside, taking into account the different sales channels, business lines, geographical locations, and customer types. Beyond this, notes the guide, all UK firms should always strive to keep sanctions risk management and assessment current.

Sanctions Compliance Plan

A Basic Sanctions Compliance Plan for a Firm

Sanctions screening good practices are detailed in the FCA’s Financial Crime Guide. A more complete good practices plan is the following:

  1. Analyse company operations to identify sanctions applicable to the business.
  2. Undertake a risk assessment.
  3. Make sure that the screening framework operates well enough in mitigating sanctions risks.
  4. Implement a screening and due diligence system that is sensitive to risk levels posed by third parties (intermediaries or outsourcers), types of transaction, and geographical factors.
  5. Screen directors and identified beneficial owners.
  6. Develop contractual clauses and warranties to protect the firm with third parties.
  7. Clearly set out company procedures and policies regarding sanctions.
  8. Communicate the sanctions policy to employees and third parties to ensure that it is recognised and understood.
  9. Clearly flag any account held by a sanctioned individual to staff members.
  10. Because a firm uses automated systems, fuzzy name matching, which introduces flexibility in how the screening system matches terms and names, should be acquired. Using such a system, compliance officers should aim to identify variant or similar spellings of names, digit rotation, name reversal, character manipulation, etc.
  11. Train employees to identify sanction risks and implement the firm’s procedures and policies.
  12. Implement proper oversight and a continual monitoring of the sanctions compliance programme.
  13. Move forward with clear escalation procedures that identify and resolve sanctions issues that arise.
  14. Promote and cultivate a culture of compliance among employees and business partners.

Famously, the UK government fined the Royal Bank of Scotland (RBS) £5.6 million for failing to implement some of the above. In fact, one of the mitigating factors of the UK’s Office of Financial Sanctions Implementation’s (OFSI) arrival at the final civil penalty figure levied against RBS was to measure the strength of the entity’s sanctions compliance programme.

In general, governments expect firms to maintain a standard quality of data that is good. For example, one that avoids typing errors, blank values, non-standard inputs, and inconsistent structure. A reliable data system ensures effective sanctions screening, as well as customer due diligence (CDD), Anti-Money Laundering (AML) and financial crime prevention, on behalf of the firm.

Sanctions Investigation

Initiating a Sanctions Investigation

A sanctions investigation can be triggered for any good reason, including a tip from a whistle-blower, a government audit of a firm’s sanctions compliance programme, a regulatory inquiry, or a negative compliance or audit finding. The compliance officer will be expected to review the sanctions screening tools and process, throughout.

A sanctions investigation includes:

  1. A review of the specific data that pertained to the screening.
  2. A review of the due diligence undertaken and featured in the screening process.
  3. An independent evaluation of the screening system’s configuration in a test environment to see if it performs well as a screening tool.
  4. A comparative analysis of search terms using the screening tool and sanctions search engine in order to find if likely matches were overlooked.

Conclusion

Thorough and complete sanctions screening is essential to any successful sanctions compliance programme. Many firms use automated economic sanctions screening tools to flag potential ‘on-the-list’ sanctions name and account matches for additional review. As a result, regulators expect solid oversight of these screening programmes and their effective use.

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