Financial Crime
Sanctions are employed by governments as a means to change the behavior of a country, regime, individual actor or company. They can serve as an alternative means of achieving political objectives and to further the prevention of terrorism around the globe. 2022 saw a dramatic increase in the number of sanctioned entities and individuals, along with further dedication of resources by sanctioning bodies to prosecute non-compliance. In a significant development last year, the Office of Foreign Assets Control (OFAC) under the U.S. Department of Treasury imposed its largest fine of USD 24 million in the past three years. This penalty came as a result of a joint resolution between OFAC and Financial Crimes Enforcement Network (FinCEN), targeting cryptocurrency company Bittrex, Inc. Such cases demonstrate the potential financial and reputational consequences for non-compliant entities. With sanctioning bodies continuing to invest in their investigative and prosecutorial functions in 2023, we should expect to see enforcement actions and settlement amounts increase in 2024.
Sanctions are an integral component of anti-money laundering (AML) and counter-terrorist financing (CTF) efforts. They enable governments to freeze assets, restrict access to financial systems, and impose penalties on individuals and organizations involved in illicit activities.
Developing resilience within a company’s customer base and supply chain is critical when determining where to allocate resources to enhance sanctions compliance programs. By identifying potential vulnerabilities and implementing effective controls, companies can better manage risk and respond to evolving regulatory landscapes.
Navigating the complex world of sanctions compliance is a significant challenge for multinational corporations. In our global survey, 44% of respondents identified geographic consistency as the top challenge for sanctions compliance programs, followed by privacy protections (39%), keeping current with changing regulations (34%), and accessibility of technological solutions to support sanctions screening (33%).
Multinational corporations and banks must contend with varying sanctions regimes, each with its own nuances and enforcement approaches. While there may be general consistencies between international regulations, the differences lie in the details. For instance, the U.S., UK and EU have differing approaches to aggregating ownership for sanctions risks, leading to situations where a beneficial owner may be indirectly sanctioned in the U.S. but not in the UK. This challenge of geographic consistency is further underscored by the survey respondents in the U.S. (50%), the UK (48%), Germany (48%) and France (48%), each citing it as a top challenge at a greater magnitude than other surveyed countries.
Despite these disparities, companies are expected to comply with all applicable sanctions regimes.
To address the challenge of geographic inconsistency, two critical steps must be taken. First, international sanctions regimes should work toward aligning their laws, guidance and enforcement. Second, the private sector needs greater support from governments through increased cooperation and access to corporate information. Survey respondents expressed cautious optimism that such support will materialize in the coming year, with 52% expecting increased cooperation between regulators and financial institutions and 61% anticipating greater corporate transparency requirements.
Russia’s war on Ukraine led to a massive expansion of sanctions programs, forcing organizations to rapidly adjust their risk management postures. According to our survey, 73% of global respondents plan to dedicate more time in the next year to enhancing their supply chain controls or diligence due to direct or indirect exposure to materials that originate from or are subject to export controls. This response may indicate that global supply chains have not fully shifted away from suppliers, raw materials, products or jurisdictions with heightened sanctions risk. Alongside this enhancement of supply chain controls, 67% of respondents plan to invest in technology to address the expected increase in financial crime.
Despite plans to enhance supply chain controls, 83% of global respondents expressed confidence that their supply chains are sufficiently supported and resilient to prevent, identify and mitigate sanctions risks. This raises the question: will they be prepared for the threats of tomorrow?
Russia’s war on Ukraine has shed light on both historic and new sanctions evasion methods. Historically, these methods have included documentation fraud, obscuring or falsifying ownership, and other classic smuggling tactics. However, new methods have emerged, such as the greater complexity of ownership behind impenetrable corporate veils in offshore jurisdictions, adding ownership layers in various countries and the pervasive use of intermediaries. Some evaders are also sheltering assets in jurisdictions out of reach of sanctions regimes. And in limited situations, such as the OFAC sanctioning of Tornado Cash in August 2022, sanctions evaders are utilizing cryptocurrencies and virtual currency mixers.
These new sanctions evasion methods may be linked to the sentiment shared by many that there are ongoing data gaps caused by limited corporate transparency laws. Information sharing among allied nations with sanctions regimes, such as the multilateral Russian Elites, Proxies and Oligarchs (REPO) task force, has been crucial in closing these gaps. However, challenges will persist in countries where there is no current or planned effort by governments to create a publicly accessible corporate registry with validated ownership information. To address these challenges, sanctioning bodies recommend that companies conduct an appropriate level of due diligence, including source of funds or wealth checks.
Future threats include public conversations suggesting that sanctions on Russia have led to unintended blowback against the U.S. dollar by creating alternative financial systems. While economic experts believe there is limited, if any, prospect for the U.S. dollar to be unseated as the world’s reserve currency, these alternative financial systems nonetheless pose unique challenges to sanctions and export controls professionals.
Russia’s war on Ukraine was viewed by some as the Black Swan event of 2022, an extremely rare and unpredictable event, but may seem obvious in hindsight. Preparing for such Black Swan events is a difficult task but a useful exercise in creating resilient sanctions compliance programs, particularly now that corporate crisis management programs have begun conducting table-top exercises for similar sanctions-relevant world events. Companies may want to consider if they are prepared should the U.S. sanction other countries at a similar scale as they have Russia.
In order to stay ahead of the evolving sanctions landscape, companies must shift their perspective on sanctions compliance programs, recognizing them as dynamic frameworks requiring regular upkeep and maintenance. A uniform approach centered around a single nation’s laws is inadequate for multinational organizations. Instead, a customized compliance program should reflect the laws of each operational jurisdiction in addition to international enforcement bodies. An effective sanctions compliance program should align with a company’s corporate culture, geographic diversity and business practices, supported by knowledgeable employees.
This approach may be seen as a luxury or a lofty pursuit for cost-constrained compliance programs; however, changing the organization’s mindset around sanctions compliance as a competitive advantage that enhances the value of the company is essential to mitigate regulatory and reputational risks. To achieve this, companies can adopt best practices such as tailoring their sanctions compliance program to reflect local culture, business practices and laws, in addition to international laws. Utilizing enhanced corporate data sets for greater data on ultimate beneficial ownership and incorporating risk assessments, training, testing and top-down support can further strengthen compliance programs.
Technology also plays a vital role in enhancing and supporting sanctions compliance efforts. Specific technologies that have proven effective include transactional sanctions screening software, particularly those enhanced by machine learning, and integrations between procurement or vendor onboarding platforms that incorporate automated sanctions screening. Tools that can rapidly process data, enrich data, identify linkages to high-risk data and integrate information from various sources have become indispensable in managing the complexity of sanctions compliance. As the use of virtual assets expands, blockchain analytics solutions are increasingly being incorporated into company controls, such as customer due diligence, transaction monitoring and sanctions screening for companies exposed to virtual assets. These innovations should continue to drive developments for other blockchain use cases for non cryptocurrency-exclusive applications such as smart contracts in the months ahead.
In conclusion, the future of sanctions compliance programs will rely on companies adopting a proactive and dynamic approach and leveraging technology, best practices and international cooperation to effectively manage and mitigate sanctions risks. By doing so, organizations can remain resilient and adaptable in the face of changing geopolitical landscapes and regulatory requirements, ensuring their continued success in the global marketplace.
Anti-Money Laundering
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