As the fighting between Russia and Ukraine forces continue, national governments globally are increasingly imposing severe sanctions on Russia and its financial sector.
One of the key challenges this is throwing up for financial institutions is ensuring that they remain compliant abreast this flurry of regulatory and compliance changes.
A recent post by Alessa by Tier 1 Financial Solutions examined the challenges financial institutions are facing and how they can remain compliant in such dangerous times.
Being the main entry point of funds into the financial system, financial institutions can often bear the worst of sanctions enforcement. Alongside this, sanctions can often include a wide raft of measures that can make risk management more complicated, with the cost of an inadequate sanctions compliance program can be high – such as loss of future business and regulatory fines.
So far, the United States, the United Kingdom and the EU have been the three main regimes that have tightening the economic screws through sanctions on Russia. They have been joined by nations such as Switzerland, Canada and a range of Asian nations. The sanctions largely target Russia’s financial infrastructure, which is massively dominated by state-owned actors.
According to Alessa, with this all considered, it is critical that FIs have a robust sanctions compliance program in place as well as taking a proactive approach to sanctions compliance, including real-time screening, ongoing monitoring and the ability to respond swiftly.
How can financial institutions ensure sanctions compliance? Alessa raised the Framework for OFAC Compliance Commitments – issued by the US Treasury in May 2019 – as providing a general starting point for financial institutions by setting out five essential components of compliance. These include management commitment, risk assessment, internal controls, training and testing and auditing.
Alessa recommended that FIs design and implement a risk-based sanctions program that it tailored to their institution based on these five elements. FIs that already have a sanctions compliance program in place may need to revisit some – or all – of these components to ensure compliance with the new Russia sanctions. This could include increasing auditing frequency and/or reviews to ensure processes and procedures remain functional and effective.
The company remarked, “It would also benefit financial institutions to review and update related policies and procedures that may impact, or can be coordinated with, sanctions compliance, such as various AML processes and practices (KYC, due diligence, transaction monitoring, etc.).”
Alessa continued that FIs should review beneficial ownership due diligence processes with an eye toward potential beneficial ownership deficiencies, loopholes and blind spots. Russia has previously been able to evade sanctions using shell firms, proxies and gatekeepers – so the firm stated that this is an area where additional scrutiny should be applied.
The alignment of third-party due diligence procedures with sanctions screening should also be considered by institutions in order to help FIs check more broadly for potential exposure to sanctions targets. FIs may also consider heightening their risk-based approach by screening for risky non-designated banks, entities and individuals and PEP screening should be given extra attention.
The RegTech firm added that many FIs – especially those conducting business abroad under multiple jurisdictions – will need to ensure they are screening all necessary sanctions lists, as most jurisdictions maintain their own lists. FIs who have working or trading with Russia should also take additional precautions, such as checking whether wealth firms or customers have recently transferred funds out of the region.
Alessa said, “FIs must work to ensure that relevant staff receive guidance and understand the latest sanctions measures so that they are able to manage increases in “false positives,” and that appropriate escalation procedures are in place, including where to direct inquiries about potential sanctions matches as well as mechanisms for the internal reporting of violations. This also includes understanding protocols for blocking transactions and freezing funds, as well as reporting to relevant agencies, such as OFAC, which may have strict deadlines.”
Any changes in policies, processes and procedures must be clearly communicated to staff impacted, with training required to ensure staff receive the latest information and remain informed, Alessa detailed. Board and compliance suite members should be kept up to date with major sanctions developments that impact the institution and the FIs corresponding approach.
The company continued, “Compliance departments should be aware of the fluidity of the situation and be prepared to respond quickly to changes and additions in sanctions requirements. This includes making any necessary arrangements for staff to receive timely information and access systems when working remotely.”
Alessa concluded that it is ‘imperative’ FIs revisit existing policies, systems and procedures to take a proactive approach to sanctions compliance, with further sanctions ‘inevitable’.
“There is the potential that secondary sanctions will be issued. Secondary sanctions target third parties that do business with the underlying sanctioned entities. Those types of sanctions are more difficult for compliance departments because of the complexity of identifying indirect business connections.”
Read the full post here.