The RegTech Pulse
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The RegTech Pulse
Taking the Pulse of Sanctions: 2024 So Far - Part One
In the first of a two-part series we discuss the state of global sanctions as seen in the first half of 2024, with special guests Saskia Rietbroek, Executive Director of the Association of Certified Sanctions Specialists, and Vincent Gaudel, Compliance Expert at LexisNexis Risk Solutions.
Today's episode highlights key changes and trends in terms of sanctions designations and focus areas, and what that means practically for compliance professionals.
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Welcome to the RegTech Pulse podcast brought to you by LexisNexis Risk Solutions. This is the podcast where industry experts discuss the latest trends in financial crime compliance. I'm your host, Julia Thorn, and this is the first in a two-part series all around sanctions. In today's episode, we'll discuss the state of global sanctions as seen in the first half of 2024, highlighting key changes and trends in terms of sanctions designations and focus areas and what that means practically for compliance professionals. In the next episode, we'll be discussing some of the enforcement actions from major regulators and how organizations can stay on the right side of these regulators. For today's discussion, I'm joined by Saskia Rietbrook, executive Director of the Association of Certified Sanction Specialists, and Vincent Gaudel, compliance Expert at LexisNexis Risk Solutions. Thanks so much for joining us.
Vincent Gaudel:Thanks, Julia, pleasure to be here. Thanks, Saskia.
Saskia Rietbroek:Thank you, Vincent, Julia, Nice to be here.
Julia Thorn:So I thought, Vincent, maybe we could start with you If you could give us a little bit of an overview of sanctions activity so far in 2024. I know that we released our sanctions pulse ebook recently, which had some really interesting stats in it, so maybe you could just dive into some of those for us.
Vincent Gaudel:Sure, yeah.
Vincent Gaudel:So we recently released the Sanctions Pulse infographic, which is a regular series that we deliver to really keep track of the sanctions trends from the key regulatory bodies. And what's really interesting is to see with numbers that what started in 2022 as what was then described as an exceptional, unprecedented level of sanctions development now looks at the new normal if you look at the number that we've seen in the first half of 2024. So, yeah, we saw really a continued intense sanctions activity in the first half of 2024. And really to clarify what we mean by intense sanctions activity, we really mean the pace, the scale of sanctions list updates. So that's pretty straightforward to measure if you look at targeted sanctions. But the intensity of sanctions activity also translates into another dimension which is less easy to quantify, and that's the complexity of sanctions.
Vincent Gaudel:But for what we can easily measure, for the pace and scale of sanctions imposed by UN, eu, uk and OFAC, let me give you some numbers for the first half of 2024. It's pretty clear and actually the numbers are rising from the same period of 2023. So, in terms of pace, we measure the 146 list updates. That's a 10% increase compared to the same period last year. That's a 10% increase compared to the same period last year and as a rough average, it essentially means that there was one update every business day. So that's for the pace. Now on the scale of sanctions, the scale of new designations. So here we look at the numbers of new targets being added to those lists. For the first half of 2024, we have recorded 2,340 net designations, again rising compared to 2023, and the percentage is 14% increase compared to the previous year. So that kind of illustrates the intensity of sanctions activity and that's obviously a source of acute operational challenges for banks and other businesses. As in sanctions matter, timely compliance is really a must.
Julia Thorn:And maybe on that point, saskia, you could give a little bit of background on maybe some of those specific challenges that businesses are facing in terms of. If these lists are being updated once a day, what kind of a challenge is that causing for your compliance professionals in your network?
Saskia Rietbroek:Yeah, absolutely. It's a big challenge for financial institutions, but also other companies, to keep up with the pace. The lists are changing. They're so dynamic, as Vincent explained, in terms of volume. There's so much more alerts to look at because there's so many more designations. You know they vary from jurisdiction to jurisdiction and if you operate in a global environment you have to really check. If you know, you used to get away with checking mostly the OFAC list, right, the US list, because they were the most comprehensive, most numerous listings. But now let's say, if you're a bank in the United States and you have maybe subsidiaries in Europe or you're maybe headquartered in Europe, you also have to be very careful with the EU list because you know some people are designated by the European Union and not by the US. So that divergence of listings makes it very complex for people working in compliance.
Julia Thorn:And just on that point around the divergence of listings, does that typically mean that one regulator has just started and then the rest will follow, or does it mean that there are just different approaches with the different regulators?
Saskia Rietbroek:I think it has something to do with politics. You know, there's some policy objectives that they have to be keeping in mind when designated in certain politicians or certain people. But there's also commercial reasons, right? Business lobbyists in certain countries are more strong than lobbyists in other countries and they are able to keep some companies off the list or some people, some business owners, off the list for commercial reasons.
Julia Thorn:And I guess, maybe diving into what have been those focus areas so far. So, vincent, you mentioned, I think, a 14% increase in designations so far this year. What's been driving those numbers in terms of regions or maybe sort of thematic focus areas for the different regulators?
Vincent Gaudel:Yeah. So to be fair and to Saskia's point earlier that overall activity by the four regulatory bodies is primarily the result of OFAC activity. Ofac has really been the most active agency among the four that we are monitoring in the report. Actually, ofac's designation only waited for two-thirds of the overall total. Ofac remains the overwhelming agency to consider and the largest list also to screen against.
Vincent Gaudel:And what's really interesting is that those updates for the first half of 2024, they were made across the board.
Vincent Gaudel:There were close to 20 sanctions programs that were touched by OFAC over the period and that's really a broad range of international issues.
Vincent Gaudel:So thematic programs from terrorism comes frequently on top in terms of number of changes, regular changes to the lists, but also some international issues such as cybercrime has been pretty active area and human rights abuses as well were among the top thematic programs.
Vincent Gaudel:Interestingly and we just touched upon the kind of the fragmentation or lack of alignment between regulators on cyber measures that's an area where we have seen enhanced cooperation between OFAC and OFC in the UK and they have actually shared intelligence and coordinated to issue a joint designation. So the same day you had a cyber-related designation issued concurrently by the OFAC and OFC as well. And just a quick note on the regions or countries that trigger sanctions responses. Obviously, we continue to see lots of actions related to Russian sanctions programs, but what's interesting is that the actual targets designated under Russia programs are no longer only located in Russia and we see really the global magnitude of Russian sanctions, because regulators are now looking at tackling evasion networks and they are going after and they are designating targets in different regions in the Middle East, in Central Asia and even Southeast Asia. We really see a global magnitude of Russian sanctions recently.
Saskia Rietbroek:Yeah, and if I may add something there as well, I've been on a couple of capacity building missions about EU sanctions mainly, you know, focus on the Russian sanctions and the sanctions that we've never adapted sanctions of this breadth and depth against any country, not even the sanctions the EU sanctions against Iran in I think it was 2012, which ultimately brought them to the table to negotiate the nuclear deal Nothing like the sanctions that we have now against Russia.
Saskia Rietbroek:And this impacts not only, you know, european businesses, us businesses, but also businesses even in countries that are not covered by the European or the US sanctions or the UK sanctions. You know countries surrounding Russia Kazakhstan, kyrgyzstan, armenia and you see businesses that can get in trouble because of sanctions that do not apply to them, but just because of their close proximity to a country that is sanctioned. That's Russia in this case. And I think this cooperation that Vincent was talking about. It is really important because if you have US sanctions and EU sanctions and UK sanctions, these sanctions are a lot more effective when they are adopted across countries, instead of just having one country adopting these sanctions. These sanctions are a lot more effective when they are adopted across countries instead of just having one country adopting these sanctions and the reach is really really far at this moment.
Vincent Gaudel:And obviously we no longer have lots of consensual issues being agreed on at the UN level, so the fragmentation is really a key issue. What's really interesting is to see that some like-minded countries trying to rebuild some multilateral networks we have seen the recent publication by Global Export Control Group right, Some like-minded countries really working towards a common set of items that are restricted to Russia, but really the trend of rebuilding multilateralism, because when you have unilateral responses it is just a patchwork of measures that are really complex to comply with.
Julia Thorn:And then what's the practical impact? So if you're a compliance department, whether you're in a financial institution or a corporation, what does that mean? I guess the frequent changes, the significant increase in designations, what does it mean for those compliance professionals on a day-to-day basis?
Vincent Gaudel:What's really important to emphasize and all businesses listening to this will be aware of this but really in sanctions matter, timely compliance is really important. Like, regulators are increasingly pushy in terms of how fast can you implement a particular list update. We're talking hours now and sometimes when you're working in a large financial institution with complex systems, complex customer databases et cetera, that's not an easy process to push a list update into those databases. So timely compliance is really important.
Vincent Gaudel:Also, just one thing I wanted to flag, because we talk about new targets like pretty obvious, a new target means potential new sanctions risk exposure for a business. But that also and we have seen those in the first half of 2024, when you have amendments to existing records. That's also pretty challenging because first it can mean you have new identifying information triggering potentially new alerts right. But even if you don't have totally new alerts, the very fact that you change a record in a sanctions list oftentimes reopens alerts that you had closed before already, right. So when we had a couple of regulatory updates modifying large batches of records, that was in itself a challenge for banks to cope with the spike of highlights that those amendments triggered.
Julia Thorn:And what about challenges around things like because you've got parties which are designated, you've got, maybe, companies which are designated, but then you have ownership rules, ownership structures, ultimate beneficial ownership, the 50% rule. Could you dive into those a little bit more as well in terms of the impact that they have?
Saskia Rietbroek:Yeah, the ownership and control rules are really complicated. I mean it's complicated but the control rule gets really challenging With the ownership. You have to know who owns 50% of which company, or more than 50% depending on the jurisdiction, the sanctions you are following. But I mean that in and of itself is hard because you don't only always know who owns these companies and the information in public records is not always up to date and the information on control, like who controls a certain company, that's even harder to know. You know, maybe their attorney will know exactly who can nominate people on the board of the company, but that's not public information and I think companies and compliance people are struggling with that kinds of companies in the middle and boards board members you know this person can nominate, you know has control over this company. This person has control over that company. It gets really complicated to figure all that out.
Julia Thorn:And then I'm sure, if somebody thinks that they're going to be, if there's a chance of becoming sanctioned, there's the potential to transfer right. You're not going to necessarily stay in control of that, so that adds another layer of complexity.
Vincent Gaudel:Yeah, the complexity is not random. I think it's on purpose most of the time.
Julia Thorn:So we've gone down the sort of the challenges and what that means and how much this is having an impact on compliance professionals. You both work in this area. I guess practical advice for compliance people working in this, in the environment that we're in now, what is some of the guidance that you would give in terms of practical things that compliance professionals can be implementing to stay on the right side of regulators?
Saskia Rietbroek:and one thing the importance of technology cannot be underscored enough. Right now it is impossible to do this manually. You have to have some sort of automated tool in place. So that is one thing, and I think also compliance folks have to push some of these responsibilities to the business lines, to the operations, because they're most of the time have contacts with the clients and they are really the eyes they're most of the time have contact with the clients and they are really the eyes and the ears of the compliance folks.
Vincent Gaudel:Just to react on what Saskia just mentioned the need for specialist data and specialist tools to help coping with those sanctions requirements. Actually, we just talked about 50% rule, ownership and control relationship. That's a perfect example of why you need to source additional data beyond the official sanctions list. Because, okay, for your customers you might be able to reconcile those complex ownership structure etc. But when you are processing transactions there is another party at the other side of the transaction that you have not done your KYC on. You don't know who is owning and or controlling that counterparty of your customers as well. So if you don't have that extra layer of sanctions risk coverage, that extra data that is not on the list but those parties are to be considered sanctioned and actually we saw a NOFAC enforcement earlier this year that for the first time noted deficiencies related to failure to detect entities as sanctioned because of ownership relationship by sanctioned entity then you have some unknown risks. So you need that extra intelligence, extra data to find those implicitly sanctioned entities.
Julia Thorn:So not an easy challenge, but certainly something that there are solutions out there to help. We're going to wrap up Episode 1 here now. In the next episode, we're going to dig into these issues a little bit more. We're going to talk about some of the enforcements that we've been seeing in the first half of 2024. For listeners, we will have a link to the Sanctions Pulse e-book in the show notes if you're interested in taking a look at that. We will see you next week with episode two. Vincent Saskia. Thank you so much for joining and we'll speak to you again soon.
Vincent Gaudel:Thank you both.
Saskia Rietbroek:Thank you very much for having me.
