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Sanctions Compliance: Addressing Today's Landscape and the Adequacy of Current Screening Controls
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Following the recent release of the EU's 13th sanctions package against Russia, Rocio Gray and Pratik Choudhary from LexisNexis Risk Solutions discuss sanctions circumvention, enforcement and effectiveness on the RegTech Pulse.
DISCLAIMER: The information provided in this podcast is for informational purposes only and is not intended to and shall not be used as legal advice. The views and opinions expressed in this podcast are solely those of the speakers and do not necessarily reflect the views or positions of LexisNexis Risk Solutions. LexisNexis Risk Solutions does not warrant that the information provided in this podcast is accurate or error-free.
Hi everyone, welcome to the Reg Tech Pulse podcast. I'm your host, Prateek Choudhury. I'm joined today by my colleague, Raseo Gray, Financial Crime Compliance Director Europe at LexisNexis Resolutions. Through this podcast, Raseo and I will be exploring the latest regulatory updates in areas of AML, concentrating on sanction screening. Raseo, so happy to have you on. Welcome to the podcast.
Speaker 2Great to have you. Obviously, we are part of this podcast, thank you.
Speaker 1Right, so let's get started. Raseo's sanctions continue to dominate the geopolitical landscape. The importance of sanctions compliance has increased in recent years. This has been influenced by a number of important geopolitical, regulatory and many other unprecedented enforcement activities the Russia-Ukraine conflict. The ever-changing sanctions environment is making it even more challenging for the compliance teams to stay on top of their compliance games. Since the first quarter of 2022, we've seen a mass movement of sanctions activity worldwide, and the 2023 continued that trend. Navigating financial and trade sanctions has not been so complex before. How are institutions coping with the current fast-changing sanctions landscape?
Speaker 2Well, I'm president, and fast-changing sanctions come with unprecedented compliance challenges. You see, I like the word unprecedented. If we obviously make reference to the first quarter of 2022,. The Russian invasion of Ukraine accelerated the pace of change in terms of sanctions activity, so we saw a dramatic increase in the number of sanctions persons and entities. And, just to give you some facts, lexis-nexis resolutions we have monitored sanctions enforcement activity across key enforcement bodies, including United Nations, the European Union, ovc from the UK and OFAC.
Speaker 2So we have seen that, yeah, mammadan, sanctions has never been that complex before. We know that they evolve constantly and obviously the nature of sanctions becomes even more complex now. So it's not a black and white exercise, right, because we have not only those targeted by sanctions, such as entities, individuals that might be already listed designated by sanctions, but also sectoral sanctions. So obviously that requires different interpretations and compliance approaches. So sanctions is not only limited to designated individuals, right. I think organizations here need to take a very proactive approach in assessing and identifying not only entities that are listed by sanctions, but might be associated, owned or controlled even by a sanctioned entity. So the complexity arises as well by the multiple enforcement bodies that enact different regulations. We know that there's not kind of like an alignment in the approaches to sanctions measures, which makes it makes it very difficult for institutions. So sanctions apply to any businesses right.
Speaker 2It's not only limited to regulated institutions that traditionally and obviously have to comply with AML and custom diligence requirements.
Speaker 2So we have seen that, for instance, when it comes to enforcement actions, we have seen how highly quantitative enforcement actions have targeted less traditional sectors due to sanctions programs and obviously, with this in mind, institutions need to really review and revisit more periodically the way that they are doing things. So if we look at the sanctions systems and controls, if we look more at the technology, the investment in direct technology is vital. So relying on robust screening systems will definitely ease tasks for sanctions compliance teams and reduce obviously the compliance expenditure, which we know continues to rise. Health action investigations faster and more obviously, more properly improve operational efficiency and strengthen current processes. So obviously there is an important component here as well to understand how these solutions are calibrated. I think regulators are now looking more at the level of explainability of how solutions are set up, how those rules have been obviously you know like put in place in the disposition in the remediation processes. So this is obviously an area that we have seen regulators have put focus.
Speaker 1So very interesting point you touched upon. We know banks and financial institutes care about AMF, right. We know travel industry airline shipping cares about trade compliance and sanctions involved in that. What are the new industries that you're seeing that are really caring about sanctions since 2023 and till now?
Speaker 2Yeah, this obviously, you know, has a lot to do with the sanctions convention. So, if you look from like 2022, the pace that the European Union has enacted sanctions measures has been staggering, right. So corporates involved in the export, import, transportation, manufacturing of goods, energy, as facing significant concerns and pressure to identify if, at any point of the supply change, they might be involved or they might have facilitated goods to the wrong business, counter parties and clients. So we continue to see very innovative ways to evade sanctions but take through third part, third commercial parties or transit countries, you know, in an attempt to evade economic and trade restrictions. And this is obviously very complex for institutions. So it's proven to be very complex for institutions.
Speaker 2So, as I said before, and I emphasize, sanctions apply to any businesses and there is an increased sense of, you know, increase the diligence and scrutiny on the trade activity as enforcement actions, you know, which continue to be high quantitative, continue to target more corporates, so less traditional sectors.
Speaker 2So we have seen, you know, an increase in force activity in corporates involved, you know, as I said before, you know, involved in the export of certain sensitive technology, do we'll use goods, energy, transportation and manufacturing, but also when it comes to the fainter sector. This is not the interesting area because we have seen how it has rapidly growing over the past years. We have seen they might have a lower level of maturity when it comes to AML compliance because even low values on sections can still represent significant risk for money laundering and enforcement actions. So any fintech firms you know PSPs, you know payment service providers, money services businesses, money exchanges, also digital currency providers change really need to adopt a very tailored, risk-based compliance program. I think is key and obviously supported by the right, you know, by robust AML screening, sanctions, screening technology.
Speaker 1Interesting. Let's touch upon tackling sanctions circumvention right, an interesting topic I know you care deeply about and spoken about. So entities subject to Russian sanctions are still likely to be finding ways to circumvent the EU sanctions regime. You know, even after two plus years, within the comprehensive 12th package of sanctions and most recently the 13th package of sanctions approved by the EU, more restrictive measures have been introduced. These packages has put in place a comprehensive regulatory arsenal against circumvention of sanctions and export restrictions. Yet these circumventions still tends to happen. How does countering sanctions circumventions remain a major challenge for all the institutions.
Speaker 2Well, it remains, I think, a challenge number one. So 100% is definitely a key challenge for institutions. It's one of the complex areas and obviously the effectiveness of a sanction programs comes, you know, with the adequacy of ensuring that circumvention of sanctions is, you know, it's addressed effectively. So we have seen that the beef focus for you know, for regulators and enforcement bodies nowadays is to ensure that the sanctions measures are, you know, enforced in the right way, with a special focus on circumvention of sanctions, on those you know that are trying to evade, finding innovative ways to evade sanctions. So this seems to be one of the most, you know, challenging areas businesses you know are currently facing.
Speaker 2You know, jurisdictions and the sanctions economic measures continue to deploy different techniques to address the same convention of sanctions. For instance, you know, like we have seen, you know, like, you know well methods such as you know like using complex financial schemes, falsifying, you know the nature, you know the origin of where the goods you know come from or where they're going to. You know, or, for instance, you know they rely on jurisdictions you know, think countries you know that have seen an increase of, you know, trade activity. We have seen also how designated persons and individuals have made significant efforts to consider the assets in an attempt to evade sanctions. So addressing the convention of sanctions is not an easy task.
Speaker 2Organizations need to ensure they undergo a very robust email sanctions screening of the customers but also of any parties within the supply chain, OK, especially when it comes to assessing financial documents, commercial documents such as letter of credits, bill of loading, ensuring the declaration of goods obviously are truthful, or transactions. Also to identify any parties, locations, goods or any means of transportation involved are subject to sanctions, designations or export control restrictions, for instance, whether those, let's say, the vessel tracking, the importance of understanding where those goods are coming from, whether they use illicit methods to move goods in an attempt to evade sanctions. So obviously organizations really need to ensure the sanctions screening technology in place can track any changes from global world that's clear but also restricted goods as they happen, because obviously they change very quickly and obviously this requires a very thorough approach and it's not only, as I said before, not only to the entities listed for sanctions, but understanding the associations that an entity might have to a sanction entity by ownership or control means. I want to actually emphasize particularly on the owner publication.
Speaker 2I recently read very interesting that I encourage the audience to read, which is called Challenges of Export Controls Enforcement how Russia Continues to Import Components for its Military Production from the KSC Institute, and it's interesting that he estimated that half of Russians' inputs of battlefield items in the first 10 months of 2023 came from manufacturers based in jurisdictions that impose sanctions. So we see how they continue to get equipped from countries that impose sanctions. So this is obviously one of the areas that are key for regulators to tackle.
Speaker 1Still going on to this day, right?
Speaker 2I mean half in 2023 is well it's a lot and obviously cracking down on those entities that help facilitate the securvation of sanctions is not easy. We obviously see there is obviously an increased appetite for, you know, but your operators obviously will find themselves in a position where, imagine, if they facilitate, you know, prohibited activities or they might be obviously used to receive goods that should then obviously, you know like that are subject to, you know like, for restrictions, with, obviously in the European Union, knowing any country that enact sanctions or economic measures. So assessing the effectiveness of a sanction program has a key component in the way that is able to tackle all the different different aspects that can prompt a sanctions convention. We see all the different elements that can be part of it. So there is no one that we can exclude. They are all critical, you know, to address a sanctions convention. I really also encourage the audience to utilize the guidance issued by the European Commission for EU operators on implementing enhanced diligence to shield against Russia's sanctions conventions. They also have, you know like, measures, you know like well, flag indicators. That I think you know is a great source of information you know to use. I think we talk obviously about sanctions intervention, about, obviously, what are, what are the key components you know like to help, you know, address, tackle sanctions, intervention effectively through, you know, email screening processes.
Sanctions Compliance and Risk Management
Speaker 2I want to give a couple of examples, because we focus on the export of goods but we need to also think about the import of goods, you know, when prohibited. You know items you know like make the way to, you know like, well, european Union, for instance, any particular country. So a few examples where we have seen, you know how, you know, but actors continue to, you know, find ways to evade sanctions. So this is like an example of a US company that supplied component or computed networking equipment to a Russian firm that produce missiles in Russia. The equipment was sold through a surrogate buyer. Obviously the entity the company didn't know, was completely unaware and obviously they formed offer quickly that was able to solve without its knowledge. So what were the consequences of this? Well, the process was shipped to actors in Russia. The export controls obviously took place and ultimately, the materials you know were used to perpetuate, you know, attacks in Ukraine months later. Thank you, but we have all the examples as well into a state right, and it was actually quite recent.
Speaker 2Another example we're talking about corporates, not obviously financial institutions. Another multinational technology company, very known worldwide that's violated multiple sanctions programs the sporty software from the US to a number of sanctions jurisdictions through a third party distribution program. Okay, so third party people involved in the process of selling components. So obviously, this third party distribution program provided prohibited software and services to designated people, blocked persons and customers in sanctions jurisdictions. So what were the failures?
Speaker 2Well, they failed to obtain relevant information to identify ownership and control sanctioned listed entities interesting. But also the systems they had in place were unable to identify variations of sanctioned designated individuals. We're talking about the inability of the system in place to identify like the names were had a misspelling or they were probably they had like maybe utilize a different alphabet If they use different naming conventions. So where? What this kind of enforcement actions tell us? Well, obviously, in the event there's a failure to undergo effective the diligence controls. This can obviously this results in a violation of sanctions. So this means that traders and financial services firms are obliged to have effective compliance systems in place In order, obviously, to protect the organizations from penalties, legal prosecution and also subsequent reputational damage. But also reputational damage, financial damage as well.
Speaker 1So we've seen yeah, exactly that right I was just about to mention. We've seen a lot happening in 2023 where circumventing sanctions have led to millions and sometimes even billions of dollars in fines, right and licenses getting revoked from particular countries. We're seeing that so often in 2023.
Speaker 2And we have seen cases as well, I think, where financial institutions had such a massive impact financially, as I was saying, where the nominal value of the shares planned by more than 50%. So this is obviously like the power of sanctions, like being obviously at the scope of face, like the consequences of not doing like the right level of due diligence. So, pratika, I think, before we move on, I think we can maybe is worth to make mention of the 13th package of sanctions that was recently issued by the EU and what it means for institutions.
Speaker 1Yeah, can you summarize that for our listeners?
Speaker 2Of course, yeah, so this new package includes now a number of individual designations and entities, so a total of 194. So, including 160 individuals and 88 entities, so this includes more than 140 companies and individuals from the Russian military industry complex which manufactured missiles, drones, anti-aircraft missile systems, military vehicles, et cetera. This also actually includes some allies from Russia, so some companies and individuals involved in the shipping of armament to Russia. When it comes to all the areas, there's been kind of like a focus on strengthening, like the EU action on the Russians, like occupation and the legal, illegal annexation of areas of Ukraine. So there's also focus on sanctioning violations of children rights.
Speaker 2So, anyway, this package is looking to deepen and strengthen, obviously, the actions to stop Russia from continuing to acquire Western sensitive technology for its Russian, mostly military. So a lot this has to usually see continues to evolve and, yeah, obviously we what we can see is a big, big focus again on tackling sanctions and conventions and obviously addressing the transit of goods through third parties, through jurisdictions that are potentially partnering with Russia. But I mean, it's not only Russia right, there are also all the international sanctions programs, but obviously Russia the Ukrainian, russian, obviously conflict has put a lot of pressure when it comes to sanctions activity.
Speaker 1Definitely complying isn't easy at all. It's very complex, you know. Our listeners know it requires much more than just checking official global regulatory watch list to comply right. So let's give our listeners some actual, real world tips or examples of how to undergo effective sanctions. Risk management, what considerations have to be taken into account when assessing indirect sanctions? You know, for example, ownership and control rules, associations, the sanctioned entities, you know. Can you give our listeners some tips?
Speaker 2Of course, this is obviously one of the most critical areas.
Speaker 1The most critical, I would say yes.
Speaker 2And we have seen actually in recent enforcement actions that continue to be, you know, like a key kind of like failure for you know on some institutions. So you know some legal entities we know that could present, you know, complex corporate structures in an attempt to conceal, you know, sanctioned entities. So the complexity as well, particularly size, in interpreting you know, like ownership and control rules of sanctioned entities because there are different approaches to that. We looked at OFAC and this is you know we looked at you know you know like the European Union and obviously the UK, you know approach to ownership or controls. So OFAC 50% rule focused on you know of course it's on ownership and not on control. So when it's under control they're not owned. So by 50% or more by one or more blocked persons is not considered automatically you know like blocked. However, ofac might designate the entity under unavailable sanctions criteria or otherwise identify you know the entity if as a blocked person, if determined to be controlled by one or more designated persons. So OFAC edges really caution when considering a transaction with an entity that is not a blocked person in which one or more you know, for instance, you know the designated persons might have a significant ownership interest that is less than 50, might be actually 49% or 48%, right. So there's obviously, you know like, a special caution, you know to that. So those non-blocked entities might be subject to future designations or enforcement actions by OFAC. So that's why it requires still, you know like, such high level of, you know like, oversight and control.
Speaker 2If we looked at the European and OFC, they have similar approaches to ownership and control measures. Okay, so, ownership as holding shares control, indirect or the factor control through, obviously, personal or financial relationships. So we know that this adds a level of complexity, you know, to screening process. So systems in place really need to be able to capture and identify any entities that will fall under ownership or control rules, which required, obviously, different interpretations and approaches to compliance, right. But I think it's equally important as well to understand, okay, an entity under the 50% ownership rule is not sanctioned, right, but we're still representing risks, you know, for an institution. So understanding the ownership, the control links you know to a sanctioned entity is really important. So I think there is kind of like an emphasis in any screening process, in any screening program in place, to rely on a provider that can actually fulfill, you know like, the data by taking into account all these different rules.
Speaker 1Got it very interesting and just to wrap this up, I'm gonna ask two questions in one here. Can you describe the biggest challenges facing organizations related to sanctioned screenings today Just three of the top yet and how can institutions ensure that their solutions that they have are effective enough to address a dress fast changing sanctions regulations?
Speaker 2Yeah, so, pratik, I think one of the you know like key aspects, you know of complexity is actually the lack of unified approach to how sanctions measures are imposed right Across each enforcement, you know like a body worldwide, and this obviously, you know, adds a very significant level of complexity for compliance teams. So Tips, I will say, ensuring that policies and procedures in place are effective and compliant and are supported by the right technology. It's obviously is not easy exercise, but I think it's key and obviously we know there are significant challenges and identify screening entities which are not directly, you know, subject to sanctions but might be associated or controlled by sanctioned entity. We have seen that in almost every single enforcement action issued by OFAC, you will see that 99% of the cases find elements of sanctions, screening failures that could have been prevented, obviously with the right Technology in place. Obviously is not only the right to review place. You need to have the right people in place, you know, with the right expertise, you know, in managing sanctions and sanctions risk, obviously.
Speaker 2So it's not only an exercise of ML, we know we will talk about, you know, life fraud as well, so it's also understanding, you know like, how institutions or how individuals operating the digital world you know like. Can we actually, you know, use additional sources of data, intellidata, intelligence through device authentication or line assessment of certain customers how they behave, you know. So I think it will get a more comprehensive view of risk. I think like going obsolete with ML screening has proven not to be very effective. So I think adding maybe some components of fraud defense cannot Value into into this process.
Speaker 1So I mean, you've teased Framel Right very brilliantly there, so I think that's our next discussion topic. We've just found that's brilliant, raseeha. Look to wrap up. Thank you so much for being with us today. Thank you for giving us your time. Your, your Knowledge on this and your input is invaluable. I'm sure our listeners will appreciate it. I know we can go on and talk the whole day about this topic, but we'll have to draw it to a closer, so thank you very much.
Speaker 2That's true, but it is obviously been a pleasure and I hope the audience find all this. You know insights are useful and, yes, be great, obviously Joining you today, so thank you very much.
Speaker 1And to our listeners. Thank you for tuning in. Make sure you look out for our next episode, where we'll dive more into the latest regulatory developments and challenges, and KYC and the convergence of fraud and AML.
