While we recognize that maintaining strict oversight of our sanctions compliance programs is imperative, the growth of jurisdictional reach and scale of actions will continue to keep us on our toes. So, what is the current state and what has changed?
What OFAC says about sanction compliance
The Office of Foreign Assets Control (OFAC) released 19 new actions just in March. And while you are adding up all of the underlying blocked subjects in not just Russia, but Iran, Nicaragua, Syria and the Balkans too, we cannot forget that the number of sanctioned subjects could grow substantially due to OFAC’s 50% rule.
What is the 50% rule for OFAC’s sanctions?
OFAC is clear on this. If a sanctioned subject (person or entity) has ownership in an entity of 50% or more, or in aggregate with another sanctioned subject, that entity will fall under the same sanctions restrictions as any subject named on their published Specially Designated Nationals (SDN) list.
That means additional due diligence is needed to complete the list of businesses you cannot work with. Depending on your risk appetite, you may be looking at any percentage of ownership by a sanctioned subject. History has shown us that sometimes an entity owned at a 10% level can switch around percentage status or even become sanctioned itself. The endeavor to gain insight into ownership* is a tricky one to say the least.
In the midst of monitoring third parties and managing risks within the current state of things, calls for more sanctions are happening as we speak. There is not a day that goes by that we aren’t reading about more and ongoing conflicts around the world.
But wait, there’s more.
Regulations for sanctions on a wider stage
A new Directive from the EU was approved at the beginning of this year. The EU sanctions: new rules to crack down on violations directive “…ensures punishment for violating and circumventing sanctions is dissuasive by making them criminal offences carrying prison sentences of a maximum of five years in all member states.” The 27 EU members have a year to adopt and transpose these rules into their national legislation. If you are doing business in these jurisdictions, you will want to take note.
Other countries, including Canada, Japan, Australia and New Zealand, piled in this March, introducing new sanctions packages against individuals and companies involved in the Russia/Ukraine conflict. And in lockstep with the EU and US; they have taken measures to sanction members of Hamas. We are anticipating the Israel/Hamas conflict to continue and have far reaching effects into the foreseeable future. Most certainly, more sanctions will be coming as a result.
The United States and UK have already conducted three coordinated sanctions actions related to Hamas fundraising efforts since October 7, 2023, including a November 14, 2023 action against Hamas leaders and financiers, a December 13, 2023 action against additional Hamas financial officials and representatives, and a January 22, 2024 U.S., UK, and Australia action against additional Hamas financial networks and facilitators of virtual currency transfers.
In regard to the EU, like OFAC, the 50% ownership rules apply, but with an additional requirement to understand if a sanctioned subject controls a business. That leaves you with the added research burden, trying to comply with vague guidance, and one that could leave you wringing your hands in front of the regulator.
What we are all doing about this
Debates abound on the effectiveness of sanctions. Clearly these assessments will go on in the background as sanctions keep rolling in and pile up. The important ability to designate sanctions has been around for centuries and will remain available as international communities join in efforts to deter bad behavior where stakes are high and the intended outcomes are for the good of all.
As these efforts continue, and we endeavor to be all in on sanctions compliance, challenges to keep our arms wrapped around efficiently and effectively maintaining control of a sound program remain for many of us.
Making your life easier, and staying out of the sights of regulators by having the right entity screening tools and resources in place is key.
What are the challenges that come with curating sanctions lists?
There are some challenges with curating sanctions lists:
- The format of the data is unstructured
- There are errors in lists such as name spellings (yes, really there are!)
- With the exception of the EU, there is no one consolidated list from other countries and jurisdictions. You have to collect them from everyone depending on where you are doing business
- One of the top challenges here is that entities sanctioned by way of the 50% ownership and control rules are not named by the regulators.
While on the face of this, it looks like you have to hire an army of people to manage all of it - especially on point 4, there are good resources out there to help you get the job done and allow you the ability to sleep peacefully at night.
What resources can you employ to combat the challenges that come with curating a sanctions list?
The key to tackling sanctions is to utilize sophisticated AML platforms which can:
- Handle the volumes of your own third party data, coupled with the regulatory data you need to continually screen and monitor those third parties.
- Help you identify and prioritize the riskiest groups in our third parties
- Chart relationships for a full 360 know your customer view
- Automate processes and allow for customization of rules and administrative needs
And you should lean on reliable and reputable providers of data sources which:
- Consolidate and quality check lists from regulators
- Enhance profiles to help resolve false positive results
- Original script names
- Dates of Birth
- Also Known As (AKAs) names
- Links to other verified sources
- Relationships which may be risky as well
- Ownership and Control status is not provided by the regulators. You will need a data provider who has the following
- Expertize in researching local language and regional nuance
- Researcher access to global and credible sources
- The ability to scale resources in monitor, potential daily changes in sanctions across hundreds of jurisdictions
While all of this sounds daunting, experts across the compliance landscape have become more and more adept at advising and partnering with the financial services, corporate type, and trade industries. You will want to seek them out and vet out their reputation and reliability. From there you will need to procure the most up to date and comprehensive technologies and data to complete your programs to make them sound. And always remember, you are not on this journey alone. We are all in this sanctions compliance mission together.
Read more about how to sharpen your sanctions compliance in our whitepaper, ‘Sharpening Sanctions Compliance with NextGen Client Screening’.
*Important note: Ultimate Beneficial Ownership (UBO) is not the same as Sanctions ownership and control. UBO encompass ownership of an entity as a whole. Sanctions ownership warns of risks associated with doing business with an entity tied to a sanctioned subject.
Photo by Hiroyoshi Urushima on Unsplash
