I have been working with sanctions officers in a range of firms around the world over the last few years as the pace of change and increase in regulatory focus has continued to rise.
What is clear is that sanctions has become a vital professional specialisation in its own right. The skills required by a sanctions officer are based on exercising professional judgment in frequently grey areas.
The volume challenge
The first challenge for larger firms however is simply volume. Individuals, entities and even vessels on the primary sanctions lists total in the thousands and are always changing. The volume and speed with which names have been added recently, and that the information must be routinely updated to account for changes in ownership structure also raises an issue.
Payments must also be screened and complications can arise from organisations sharing the same acronym as a listed target (for example “SLA” being used in a SWIFT payment field and a potential match with “Sudan Liberation Army” being picked up by screening tools). We also know that there are a variety of spellings of names such as “Mohammad” and that many targets on sanctions lists have multiple aliases.
A human being must look at matches to rule out false positives and determine whether to escalate. The scale of the undertaking is huge in terms of potential matches. Larger firms are wrestling with building processes to manage these volumes effectively while ensuring the risks are controlled.
Overlaying risk appetite and judgement calls
When examining business relationships sanctions officers will have to overlay their firm’s own risk appetite over the legal restrictions of the applicable sanction regimes.
For example if a firm has a customer who does 5% of its business in Iran, and the firm’s services do not directly support this business is this level of indirect exposure an acceptable risk? Wider considerations such as the nature of the business activity in Iran and the longer term revenue trends may all be consideration in making the decision to enter into or maintain such a relationship.
Let’s take another example of the challenges facing sanctions officers:
Bank A provides trade finance to a Russian manufacturing company that is 20% owned by a Russian oligarch on the SDN list, 40% by shell companies whose beneficial owners are unknown and the rest by a public float:
Bank A must take steps to understand the true beneficial ownership of shell companies that own 40% of its manufacturing company customer are on an US OFAC list (for example the SDN List), because combining their ownership with the oligarch’s could be problematic. The challenge, however, is doing the research to find out just who the shell company’s beneficial owners are. Foreign countries have different ownership laws and names and laws may be written not only in different languages but unfamiliar alphabets--Russian is in Cyrillic, for example. In addition, holding companies may use nominees to hide true ownership and countries’ bureaucracies may be complicated or inadequate to obtain the necessary information. In many jurisdictions there’s a lack of transparency around beneficial ownership and there may be the use of nominees hiding true ownership.
Screening systems: Keeping the cogs turning smoothly
Firms must be also prepared to demonstrate to examiners that they are perpetually updating their systems to comply with sanctions. “Fuzzy logic” software designed to spot near matches and case management systems to weed out the false-positive and other misleading search results degrade if they’re not constantly recalibrated. If firms fail to undertake these regular health checks, the number of hits you get will shrink away and their quality will be poor.
So regulators and examiners are increasingly asking about the training of sanctions officers to ensure they can judge when to release payments or enter into business relationships with customers and counterparties, and when to report suspicious activity to the proper authorities. In addition, they’ll look to see whether the company has a culture of openness and transparency and systems to detect attempts to circumvent sanctions (such as resubmitting the name or location of a transaction to avoid sanction breaches).
The response: Professionalisation and enhanced training
As a result of these trends the ICA will be launching a new Specialist Certificate in Sanctions Compliance later this year and their other qualifications are being expanded to consider in greater depth the issues related to sanctions compliance in this demanding and challenging environment. Details of all ICA qualifications can be found here.
Would you like to develop your knowledge?
The ICA Advanced Certificate in Managing Sanctions Risk explores the intricacies and challenges of meeting sanctions obligations. It is a must have qualification for anyone involved in identifying, understanding and managing sanctions risk exposure.
Alternatively, the ICA Certificate in Managing Sanctions Risk provides you with an opportunity to explore the frameworks and drivers of sanctions, the risks that sanctions present to firms and the controls implemented to address those risks.