Under European Union law, EU companies are required to conduct due diligence when trading with third countries to ensure that their business partners are not circumventing EU sanctions.
For European businesses most exposed to sanctions risk, guidelines are set for implementing enhanced compliance checks, assessing business partners, transactions and goods. There are red flag indicators of sanctions circumvention by business partners and customers and they are indicators designed to warn EU businesses of possible risks when establishing new commercial relationships.
Assessing and Managing Sanctions Risk
EU legal entities should identify, assess and understand the sanctions risks that are most relevant to their business activities and operating model, and then take measures to mitigate such risks. This is done on an ongoing basis, including based on open source information. Depending on the nature of the business activities, sanctions evasion may vary.
Companies should conduct appropriate compliance due diligence, calibrated to the specifics of their business and the risk exposures inherent to that business. Each entity should develop, implement and regularly update an EU sanctions compliance program that reflects its individual business model, geographic region of commercial activity, and the associated risk assessment of customers, business partners and personnel.
How Sanctions Screening Works
Sanctions screening is a control used primarily to automatically monitor individuals on sanctions lists to prevent transactions with prohibited individuals or countries. It is essentially comparing one line of text to another to identify similarities that suggest a possible match between the person transacting and an individual on a sanctions list. The process compares data, customer and transaction records, against lists of names and other sanctions indicators, personal data, or locations.
Although there is no single compliance model, EU firms should adhere to the assessment of sanctions evasion risks and typologies set out in the European Union guidelines. This approach to risks and their management should form the basis for applying proportionate work, focusing on those sectors considered most vulnerable to sanctions, and, accordingly, for implementing adequate compliance controls.
Checking Counterparties and Export Controls
The next aspect should be proper compliance procedures for checking counterparties to ensure that these individuals do not trade in sanctioned goods, do not work with sanctioned states, and if necessary have a sanctions program and compliance staff. When exporting restricted goods, companies in the EU should be aware of these restrictions. It is also possible to add contractual clauses on compliance with sanctions between business partners to legally prohibit further re-export of goods to EU sanctioned states.
EU Member States implement and enforce sanctions. The European Commission plays a role in ensuring uniform implementation across the Union and monitoring compliance by Member States. If a product subject to sanctions and prohibited for export is nevertheless exported from the EU to another country outside the EU, the supervisory authorities may consider such actions as a failure by the exporter to carry out proper compliance checks and a breach of sanctions legislation. Any suspicious trade activity should be reported to the relevant national authority, such as financial intelligence units, customs and border authorities or another supervisory authority, if any.
Correspondent Accounts and Reporting Violations
Financial transactions involving correspondent accounts are considered high-risk and may lead to sanctions evasion. Financial institutions that maintain correspondent accounts with foreign financial institutions are required to implement risk-based enhanced due diligence systems, have compliance policies, procedures and processes that are reasonably designed to assess the risks exclusively for correspondent relationships.
In the context of preventing violations of sanctions, financial institutions should monitor transactions related to correspondent accounts.
Sharing information on violations of EU sanctions contributes to the success of investigations. Anyone aware of possible violations of any EU sanctions can report them to the European Commission, completely anonymously. The information reported may relate to the sanctions violations, their circumstances, as well as the individuals, companies and third countries involved. It may also include facts that are not generally known but are known to the individual and may cover past, current or planned violations of sanctions, as well as schemes to circumvent EU sanctions in general.
Sanctions screening mechanisms are therefore a key means of controlling compliance activities and preventing the risk of financial crime to which institutions may otherwise be exposed. It is important that sanctions screening is implemented and maintained as part of a wider set of compliance measures and within the risk profile of the institution itself.
About the Author
Oleksandr Shchybun, CAMS
MLRO at Remittance360 Ltd
United Kingdom, http://linkedin.com/in/oleksandr-shchybun-0b7294a2
Oleksandr Shchybun is a certified AML specialist (CAMS, USA) and a certified financial crime investigator (Utica University, USA). He is specialising in money remittance and card issuing businesses. O. Shchybun has spent more than 15 years working as a compliance officer at a number of financial institutions including conglomerates such as American Express, MoneyGram, and financial startups, e.g. Remittance360 Ltd. He is based in London, United Kingdom.
