Understanding Economic Sanctions
Latest Economic Sanctions
Imposing economic sanctions is a powerful foreign policy tool used by countries and international organizations that can include travel bans, asset freezes, arms embargoes, and trade restrictions with countries, individuals, and entities. The US Department of the Treasury’s Office of Foreign Assets Control (OFAC) “administers and enforces economic and trade sanctions based on US foreign policy and national security goals.” The names of individuals, entities, aircraft, vessels, and countries are incorporated into OFAC’s list of Specially Designated Nationals and Blocked Persons (“SDN list”), which blocks U.S. persons from transacting with both them and their assets. The SDN list is updated ad-hoc, with new additions to and removals from the list.
On February 23 and 24, 2022, OFAC released additional actions against individuals and entities involved in the ongoing escalations in Yemen and Ukraine. These updates, like others before them, often come unannounced and financial institutions are expected to institute these updates immediately. The most recent actions include the addition of Nord Stream 2, Belarusian and Russian banks, and individuals involved with these entities to the SDN list. Due to theses actions impacting close to 80 percent of banking assets within Russia the financial and economic effects on the country will be pervasive.
It is increasingly important for financial institutions to ensure their compliance models reflect the most recent sanctions and embargoes guidance that domestic and global regulatory bodies impose. Recent actions from regulators regarding new additions to Sanctions lists have included geographical jurisdictions, individuals, and entities involved in geopolitical conflicts in Eastern Europe and the Arabian Peninsula with additional actions likely to follow. Compliance Officers should assess whether their Model Governance processes are conceptually sound, including periodic testing of models to confirm that models’ settings and thresholds are performing as intended, as well as ensuring that the methods of updating and utilizing the latest Sanctions lists (whether automated, manual, or both) are functioning correctly.
Preventing Violations and Penalties
Sanctions-related violations can be a very costly expense for financial institutions, and with dynamically changing situations across the globe, BSA/AML and Sanctions Officers should stay on top of the latest developments to avoid incurring penalties. Hefty fines against financial institutions for failing to comply with regulations have increased in recent years and is testament to the growing difficulty of adhering to sanctions compliance, as penalties and fines not only affect financial institutions’ net value, but also their reputation.
In addition to maintaining and utilizing current Sanctions lists, a financial institution’s KYC Program should also ensure that its customers are screened and their records are up-to-date and updated when customer information changes. These ongoing monitoring processes are particularly relevant for customer information regarding Ultimate Beneficiary Ownership (UBO). The identification and maintenance of UBO records for customers can be of a complex nature and is typically dictated by existing CDD/EDD processes; these records should also be periodically evaluated in order to confirm that the most recent information is saved.
Ensuring that these processes are conceptually sound and provide sufficient risk coverage demonstrates that proper controls are in place for mitigating risks and minimizing risk exposure. Establishing a conceptually sound Sanctions/Compliance program is a powerful deterrent in preventing regulatory fines. Effective programs should be complex enough in order to successfully meet regulatory changes, incorporating advanced monitoring solutions, artificial intelligence, and empirical support all the while balancing overhead and resources; an effective Sanctions program is a combination of policies, procedures, and technologies that enable a financial institution to ensure that it does not provide direct or indirect services to sanctioned parties, without a license and the approval of OFAC.
Regulators are looking for financial institutions to implement sufficient controls within their Sanctions Screening program, and it is the responsibility of the financial institution to have thorough knowledge of the risks associated with their products, geographies, and customers from both a qualitative and quantitative perspective – which is especially important now, given the dynamic and fast changing regulatory environment.
To learn more about sanctions and sanctions screening, visit Matrix Advisory.