Strategically Managing the Evolving Landscape of Sanctions: A Call to Action for Financial Institutions

In today’s interconnected global economy, our consulting practice experts have seen that sanctions have become an increasingly powerful tool for governments and international organizations to influence events and promote desired behaviors. The landscape of sanctions is constantly evolving, driven by changes in international relations, political dynamics, and technological advancements.

This dynamic environment poses significant challenges for financial institutions. They must remain agile, ensuring compliance while also prioritizing the customer experience.

In this article our Client Lifecycle Management consultants outline the global sanctions landscape, share recent developments, provide an outlook to the future, and convey the key elements for an effective Sanctions Compliance Framework.

The Global Sanctions Landscape

International organizations, including the United Nations (UN), the European Union (EU), national organizations with a global reach such as the Office of Foreign Assets Control (OFAC) in the United States of America and regional organizations such as the Associations of Southeast Asia Nations (ASEAN), employ sanctions to address critical issues. These include nuclear proliferation, terrorism, and political conflicts, amongst others. The most prominent watchdog, the OFAC, earned a reputation for strict enforcement and imposing multimillion and even multibillion USD fines for sanctions violations1 and will continue its supervision.

Recent Developments in Global Sanctions

Notable developments in sanctions have significantly impacted the financial industry in recent years. Several factors contribute to this constantly changing environment:

• Geopolitical Shifts -- Geopolitical tensions have increased, leading to the imposition of more sanctions. For example, the extensive sanctions imposed on Russia by the UN, EU, and OFAC in response to its actions in Ukraine created impact in the financial industry. Several countries, including the UK and Singapore, have followed suit and imposed similar sanctions on persons, investment and trade on items such as military and defense goods, petroleum products, and iron and steel.
• Technological Advancements -- The digital age brings new challenges where restrictions can also encompass virtual assets such as cryptocurrency. Sanctions compliance in these relatively new areas proves to bring challenges for financial institutions.
• Globalization -- The global financial system is becoming more interconnected and the international trade infrastructures are growing. In particular, where financial institutions are operating in multiple jurisdictions, adherence to international and jurisdictional regulations is even more complicated. Sanctions can involve the origin of goods and components, and there must be effort to prevent circumvention and evasion of these.

Themes on the Horizon

The complex web of multiple sanctions-imposing agencies and governments creates a great challenge with primary and secondary sanctions.

• Primary sanctions: typically imposed directly by one government on a targeted entity or individual, can disrupt international commerce and diplomatic relations. 
• Secondary sanctions: imposed by a different entity to penalize those engaging with primary-sanctioned parties, increasing the complexity further.

Coordination, interpretation discrepancies and unintended economic consequences pose significant challenges, making compliance difficult for international businesses and governments alike.

Expect to see more sanctions programs spanning over multiple jurisdictions, from the Americas to Europe and APAC through organizations like the UN, as coordinated efforts enhance the effectiveness of such.

Recently, The European Parliament and the Council have come to a provisional political agreement on The European Commission's proposal to harmonize criminal offences and penalties for the violation of EU restrictive measures. Sanctions enforcement, as well as evasion and circumvention, will continue to be of interest to us.

Sanctions now and in the future will remain a challenge for financial institutions as they depend on a wide range of geopolitical, economic, and diplomatic factors. The developments of high-profile countries in the world of sanctions -- such as Russia, Israel, Iran, and Venezuela -- will continually shape the evolving sanctions landscape. Financial institutions and stakeholders must remain alert, adapt to changing circumstances, and seek expert guidance to effectively navigate this dynamic environment.

The Imperative for Financial Institutions

As financial institutions, including banks and insurers, face significant challenges in complying with (inter)national sanctions, we are continuously in dialogue with our partners about their related challenges. Sanctions compliance is not just about adhering to laws; it is a strategic imperative to maintain business continuity, safeguard reputation, and ensure a sound financial ecosystem.

Financial institutions must establish a robust framework to ensure ongoing compliance. Through years of working together with financial institutions on all levels and liaising with supervisors, we have identified seven key areas for an effective Sanctions Compliance Framework:

An Effective Sanctions Compliance Framework Requires:

1. Governance: A demonstrated commitment from senior management is essential for an effective and robust sanction compliance program. Financial institutions with international operations must coordinate sanctions compliance efforts across multiple jurisdictions. International sanctions laws and regulations could also be applicable to organizations operating solely on a national level. The governance framework must provide clear ownership, responsibility and accountability to ensure the governance works throughout the organization as designed. In addition, scenario plans need to be developed to anticipate changes in sanctions regimes and how they would impact compliance, business and operations.
2. Policies and Procedures: Create and maintain comprehensive sanctions policies and procedures that align with applicable national and international laws and regulations. The risk appetite should be integrated into internal procedures including a comprehensive risk assessment methodology to understand the institution’s specific sanctions risk exposure, identify and assess direct and indirect sanctions risks, screening methodology, enhanced due diligence, the escalation process, freezing assets, and reporting of possible sanctions violations. Continuously monitor changes in these regulations and adapt policies and procedures accordingly.
3. Systems and Tooling: Implement transaction filters to avoid direct transactions with counterparties on sanctions lists, transaction monitoring systems with finetuned business rules to detect transactions that require attention, and processes to identify, assess and escalate alerts timely. It’s crucial to invest in screening systems that efficiently and accurately identify matches with such lists and improve efficiency and effectiveness of these systems. Ensure the data used for screening is accurate and up to date to reduce false positives and install periodic evaluation of business rules to further optimize and increase the ratio of true positive alerts.
4. Continuous Learning: Foster a culture of compliance by training staff on applicable sanctions laws, regulations, and internal policies. Staff possessing sufficient knowledge and expertise is a prerequisite for an organization to adhere to sanctions. A feedback loop should have a prominent place in this process for the organization to share best practices and continuously improve the tools to handle sanctions-related challenges.
5. Change Management: As the landscape constantly changes, ongoing compliance means continuously monitoring and updating of sanctions lists, conducting gap and impact assessments, and determine, manage, and implement necessary changes within the organization for continuous adherence.
6. Audit and Testing: Conduct regular internal testing and audits to evaluate the setup and effectiveness of sanctions compliance controls. If these result in material or immaterial findings, remediation measures must be taken to resolve any weaknesses in the current controls or practices. Financial institutions should consider external audits or testing the effectiveness of controls by independent, third-party experts.
7. Reporting and Communication: In case sanctions violations or suspicious activities are identified, this can result in stopping the transaction or asset freezing and reporting to the regulators. The organization should establish clear processes for assessing potential violations, escalation routes, and prompt reporting to the regulators to adhere to regulatory reporting requirements. Communication of ‘lessons learned’ will contribute to enhancing the organization’s ability to comply with sanctions in the future.

Key Takeaways for Financial Institutions

We frequently encounter one or more key areas where financial institutions need expert guidance to address their own challenges. Sanctions regulations and policies are subject to rapid change and staying informed about national and global developments is essential for compliance. Violations can result in substantial fines and damage to reputation, affecting customer trust and investor confidence. Financial institutions must strike a balance between complying with such regulations and pursuing profitable business opportunities, especially in regions or sectors with high sanctions exposure.

Adhering to national and global sanctions requires a proactive and comprehensive approach that includes clear governance, policies and procedures, systems and tooling, continuous learning, change management, audit and testing, and reporting and communication. Financial institutions must invest to establish a robust framework and compliance culture to adhere to relevant laws and regulations and avoid (un)knowingly facilitating sanctioned parties or contributing to evasion or circumvention. Collaboration with legal, compliance and sanctions experts is essential to an effective sanctions’ compliance program.