Effective Strategies for Sanctions Screening. How to comply?
Sergei Magnitsky, a Russian tax lawyer who courageously exposed corruption by Russian officials. Tragically, his pursuit of justice led to detention and his eventual death. In response to such gross human rights abuses and corruption, the US government enacted the Global Magnitsky Act, a prime exemplar of thematic sanctions.
The past decade has witnessed a tremendous expansion of financial services. The tech adoption has led to a burgeoning financial infrastructure, rising digital transactions, cross-border payments, and a growing customer base. It has also made financial crime compliance complex and difficult to manage.
Sanctions and customer screening have emerged as an integral component of the compliance landscape. Since 2022, enforcement actions and investigations into sanctions violations have seen staggering fines, surpassing $10 billion imposed on financial institutions.
Managing sanctions risk has never been so complex. As governments increasingly rely on sanctions as a tool for political foreign policy, new entities are added to, and removed from sanctions lists, all of the time. Over the past 5 years, the average number of designated entities has increased significantly. Whereas they previously targeted only specific named entities (states, ships, aircraft, organisations and individuals), now narrative and sectoral sanctions have been introduced targeting specific sectors and prohibiting specific activities, which are more open to interpretation.
But it’s not easy for financial institutions (FIs) to keep up with expanding sanctions lists. There are multiple regulatory bodies with their independent list. Further, the definition of what constitutes a sanction is in constant flux and is more open to interpretation than ever.
This article is the first in a series on screening compliance. In this article, we will explore what are the new regulatory and compliance trends that are adding to the challenges of navigating the sanction screening maze. Stay tuned for the next segment, where we explore the instrumental role of technology in optimising our compliance efforts.
Sanctions Screening is for Everyone
Regulatory bodies have been continually broadening the landscape of industries subject to these measures as they unearth more verticals leveraged by sanctioned entities to funnel illicit funds. This has led to the inclusion of sectors such as upscale real estate, art galleries, investment firms, auction houses, cryptocurrency operators, and building societies as well.
In essence, if you are a regulated company, sanctions screening is for you. Financial institutions have traditionally been in the spotlight when it comes to sanctions compliance. However, the reach of these regulations extends far beyond the realm of banks. The net now encompasses diverse sectors, from the opulent world of art galleries to the innovative domain of cryptocurrency operators.
Sanctions Lists are Constantly Evolving
The complex web of sanctions lists is a significant contributor to the growing complexity of sanctions screening. It’s not just one list that companies need to worry about. Different governments and organizations have their own lists, each with its unique set of criteria. These lists don’t always align, making the compliance landscape even more intricate.
Imagine navigating through a maze where the walls are constantly shifting. That’s what it feels like for businesses trying to stay compliant with sanctions. New names get added, and others are taken off frequently. Moreover, the definition of what constitutes a sanction is in constant flux and is more open to interpretation than ever.
US Sectoral Sanctions
One example of the increasing complexity in sanctions compliance is the introduction of sanctions that target both entities and their underlying activities. Take, for instance, the US sectoral sanctions introduced in 2014 in response to Russia’s annexation of Crimea. These sanctions target certain specified sectors of the Russian economy, including energy, finance, and armaments, prohibiting certain types of activity by US persons with identified individuals or entities operating in those sectors.
More recently, following Russia’s invasion of Ukraine in 2022, additional sectoral sanctions were imposed. These sanctions limit specific investment activities, among other things, with Russian entities. This new type of sanction has added another layer of complexity to compliance, requiring businesses to stay vigilant and adapt to changing regulations.
OFAC 50% Rule
The OFAC 50% Rule is another facet of sanctions screening that adds complexity. According to this rule, entities are considered blocked if they are owned 50 per cent or more (directly or indirectly) by one or more blocked persons. While the rule aims to prevent sanctioned entities from bypassing sanctions through indirect ownership, it places a significant burden on exporters and businesses to determine beneficial ownership of foreign companies.
OFAC does not publish a list of majority-owned entities by sanctioned individuals or entities. This means that compliance teams must do the legwork to determine ownership, adding a layer of complexity to sanctions screening.
Divergence in Thematic Sanctions
Thematic sanctions are a departure from traditional sanctions programs that focus on a particular country or region. Instead, they target specific issues, such as serious human rights abuses and corruption, regardless of geographic boundaries. The Global Magnitsky Act, for example, introduced thematic sanctions to target those involved in human rights abuses and corruption.
These thematic sanctions offer governments a global reach to respond quickly to global issues. However, they also introduce complexities, especially for international companies. Differences in how countries implement these sanctions can create additional compliance challenges. For instance, while the UK has sought to control certain professional and business services to Russian subsidiaries of UK parent companies, the EU and US have exceptions in place, creating divergence in compliance requirements.
As we navigate the ever-evolving landscape of sanctions compliance, it’s clear that the maze is becoming increasingly intricate. Keeping up with expanding sanctions lists and the new targeted sanctions are adding to the cost of compliance. In this dynamic environment, a robust and adaptable compliance strategy is key to successfully navigating the maze of sanctions screening.
Navigating screening with technology
In our next instalment, we have explored the transformative power of technology, unveiling how AI and machine learning solutions can be the compass to navigate this intricate maze with precision and efficiency. You can read my analysis of using fuzzy matching and advanced AI to address name-matching challenges here: What’s in a name? A whole lot when it comes to name matching.
If you are looking to eliminate manual effort from your compliance operations, reach out to us!
Also, you can download our ebook on Navigating Screening Challenges, which covers key screening components, current trends, and challenges in AML screening.
