Despite global economic uncertainties and strife, sanctions compliance is mandatory. Due diligence can be enhanced through digitalization, according to experts.
At a time when organizational resources may already be stretched thin, the speed and frequency of change in economic and trade sanctions regimes from major international regulators has increased the complexity associated with financial crime and trade compliance.
In the first six months of 2020, not a week went by without a change in economic and trade sanctions regimes from the United States’ Office of Foreign Assets Control (OFAC), the United Nations (UN) or the European Union (UN). The pace of change from 2019—where there were sanctions regime updates every month—has continued into 2020.
Despite a slowdown in activity during the early days of the COVID-19 problem in the US, the count of sanctions records added or modified by OFAC was up by 178% in Q2 2020 as compared to Q1 2020, illustrating the continued regulatory pressure amidst the pandemic. These observations come from new research data on trends impacting the Asia-Pacific region’s (APAC) sanctions-landscape during the COVID-19 pandemic. Accuity, the firm which commissioned the research, is a global provider of financial crime screening, payments and know your customer (KYC) solutions.
Watching the sanctioned entities
There are 329 OFAC-sanctioned entities sited within the Asia-Pacific region as of end-2019 (180 in China, 48 in Thailand, 38 in Hong Kong, 20 in Singapore, 14 in Philippines, 12 in Indonesia, 11 in Malaysia, and six in Vietnam).
Additionally, there is a separate North Korea-focused regime comprising 404 OFAC-sanctioned entities, and further international lists of sanctioned entities under categories such as narcotics (2,376), terrorism (1,679), weapons of mass destruction proliferation (576), human rights and corruption (265) regimes, amongst others. It is therefore critical to promoting sanctions compliance in the region.
Research has found that while financial crime supervision over anti-money laundering (AML) and combating the financing of terrorism (CFT) is in place in most APAC countries, its effectiveness greatly varies. Furthermore, few counties have dedicated local bodies for sanctions enforcement.
Based on the Financial Action Task Force Mutual Evaluation Reports that assess the robustness of national compliance frameworks, Australia, Singapore, Hong Kong, Macau, South Korea, and Taiwan were among the countries that ranked highest for technical compliance and effectiveness, while several countries in the region were among the lowest ranked.
Said Bharath Vellore, Managing Director, APAC, Accuity: “Organizations in the APAC region have a key role to play in implementing international sanctions. This is due to the countries’ strategic position as international trade and financial hubs, and their proximity to sanctioned countries (such as North Korea) and what OFAC and other regulatory entities deem as high-risk areas—all of which bring exposure to financial crime and sanctions evasion risks.”
For organizations in the APAC region, it is worth noting that while OFAC operates on behalf of the US government, it has extra-territorial reach, which means that any cross-border transaction taking place in US dollars (USD) will eventually pass through the Federal Reserve and is therefore within the scope of OFAC regulation, regardless of where it originates or clears. Since USD is a preferred currency for most global trade, OFAC, and ultimately the US government, has a unique level of regulatory oversight over the global financial system.
“As these complex sanctioned-entities-lists and regimes continue to evolve week-on-week, digitally transforming and streamlining sanctions and financial crime screening processes—(through) automation, APIs and real-time data—is crucial for staying on the right side of regulators,” said Vellore.
Large banks still making the headlines
OFAC, in particular, has showed no signs of letting up in terms of sanctions enforcement. In 2019, US$1.3bn worth of fines and settlements were issued by OFAC for sanctions breaches—more than in any previous year, thereby highlighting that the financial penalties of non-compliance have never been higher.
Since 2014, financial institutions have accounted for 30% of OFAC’s enforcement actions but paid 90% of the total amount of financial penalties. This included OFAC’s recent settlements with global financial institutions, which have continued to weigh heavily on the overall amounts.
In the case against British Arab Commercial Bank, for example, the theoretical fine was so high that it would have threatened the bank’s very survival. As a result, the fine amount had to be reduced to be bearable. Last year’s schemes typically involved willful conduct to obfuscate sanctionable activities or failures to account for sanctions red-flags.
In the APAC region, where several banks still maintain a manual or legacy system for compliance and due diligence checks, the current pandemic has introduced further challenges. With many businesses receiving financial aid from government stimulus packages, sanctioned entities and criminals will inevitably seek opportunities to sneak-in illicit financial flows amongst the sheer volume of transactions taking place. In these circumstances, pinpointing questionable activity without impeding legitimate customer activity, will prove difficult.
Many legacy screening systems also only allow access to a compliance checking system if a user is logged-in at the bank’s headquarters, leaving remote working compliance teams handicapped until measures can be adapted.
Finally, the requirement for financial institutions to screen their customers and transactions against official sanctions-lists extends beyond the ever-changing sanctioned entities-lists themselves. Any entities owned 50% or more by a blocked entity must also be blocked, according to OFAC rules. Additional entities such as subsidiaries, countries, cities, aliases, alternative addresses, bank branches and routing codes, are considered within the scope of the regulations, but are not extensively captured in official lists issued by the authorities.
Said Vincent Gaudel, Compliance Expert, Accuity: “For banks particularly, switching to a remote-working setup poses many logistical and security challenges, and a more sudden jolt toward digitization than might otherwise have been comfortable. With staff working remotely or absent due to sickness, switching to ‘emergency mode’ has had a knock-on effect on the efficiency of processing transactions, managing screening systems and lists, and allocating resources to those tasks.”
Gaudel said firms that have already transitioned toward cloud-based tools that are automated, thoroughly-calibrated to integrate quality sanctions data sources to proactively identify red flags and provide explainable compliance audit trails, have already experienced a significant advantage during the current pandemic.
All industries are on OFAC’s radar
In 2019 alone, companies as varied as Apple, General Electric and Elf Cosmetics had reached settlements with OFAC, reinforcing that sanctions and financial crime compliance is not a challenge that is exclusive to just financial institutions.
With high-profile cases like MID-SHIP reaching a settlement with OFAC for sanctions violations by its China subsidiary and North Korean ship being seized for violating international sanctions while in Indonesian waters, the APAC region’s freight and cargo sector stands out as an industry that is being closely monitored by OFAC.
According to research by Accuity, the number of sanctions issued by OFAC against maritime vessels has soared 164%—from 221 in July 2018 to 583 in July 2019.
Vessels play a major part in facilitating international trade, and over the last year there have been multiple examples of sanctions breaches, enabling goods to be shipped to and from various sanctioned geographies.
For instance, Eagle Shipping International recently reached a settlement with OFAC for violations under a previous management. Between 2011 and 2014, Eagle Shipping had entered into an agreement with a company in Singapore to transport sea sand. Forty-one of these voyages were in violation of the now repealed Burmese sanctions, or to the benefit of Myawaddy, a sanctioned entity at the time of these voyages.
Digitalizing due diligence
Said Saurabh Nagar, Director, Trade Compliance, APAC, Accuity: “While the pandemic has caused a significant contraction, international trade will not completely grind to a halt. Regulators are therefore expected to maintain stringent supervision over banks, cargo carriers and freight forwarders that are still carrying out trade finance activities.”
To meet regulatory expectations, all parties involved in a trade transaction must be equipped with advanced, data-driven compliance technologies that can screen for sanctioned entities throughout the entire trade lifecycle. “This includes screening the sender, recipient, the goods themselves, as well as monitoring the journey of the shipment to ensure there are no sanctioned entities or suspicious circumstances that could pose a risk,” Nagar added.