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How Sanction Checks Mitigate Cross-Border Financial Risks

With globalization, countries tend to open their borders to foreigners for escalated growth and investment opportunities. Bringing global development and economic prosperity through international trade, cross border financial activities bring along the grave shortcomings of diversified financial crimes such as money laundering, terrorist financing, and proliferation funding. Amid Russia-Ukraine conflict in 2022, the trail of sanctions has seen a rise in the slope while making sanction check an inevitable measure for financial institutions to combat predicate risks in cross-border transactions.

According to UNODC (United Nations Office on Drugs and Crime), around $1.1 to 2.1 billion is illicitly flowed through the financial systems while these digitas merely represents the stats for opiate trade leaving a fairly high ratio of illicit financial flows associated with other crimes.

Aimed to unearth less explored areas, this digital paper will briefly elaborate the sanctions screening and a swift pathway to traverse the complexities of sanctions and associated regulations while safeguarding the mission of global development.

What is a Sanction Check?

Reinforcing the regulatory reforms on countries and individuals to fight financial crimes, several economical and global restrictions are imposed on the subject and facilitating such restricted entities through financial activities can push your business under the bus of severe non-compliance consequences. The robust process of screening against sanctioned countries and oligarchs while performing enhanced due diligence is termed as sanction check. To limit the sanctioned individuals and countries from accessing the financial system to flow their illicit proceeds, the Financial Action Task Force (FATF) in its Recommendation 6 enforces financial institutions to conduct screening for targeted financial sanctions in alignment with the UNSCRs (United Nations Security Council Resolutions).

Illicit Flows through Financial Institutions (Banks & Insurance Firms)

Financial institutions, being more vulnerable to criminal abuse such as money laundering and financing for terrorism and proliferation, need to be more vigilant and scrutinized while facilitating their customers. Let me put a case study here to better understand how the crime actors exploit the cross-border financial integrity with their sophisticated yet shadowed tactics.  The names and other information of the events will be kept blind to maintain confidentiality.

Case Study: Cross-border Financial System Exploitation

Issued by the Malta Institute of Accountants, a cross-border trade was executed between a company in Malta having no employees and a German construction company. The transaction was made through credit of €6 million for a specialized construction equipment and was instantly resold to another Turkish company for €6.1 million while the equipment was sent from Germany to Turkey with payments being delayed for no mentioned reason. The resources claimed a close connection of supplier in Germany and second buyer in Turkey with similar correspondence address and legal advisory.

Drawing the Conclusion

Multiple parties involved in the cross-border transactions caused layers of complexities in catching the illegal activities being performed through financial systems, which in turn make it difficult for the law enforcers to identify the flow of proceeds which could be conducted as money laundering.

Sanctions Legislation for Insurance Firms

Forfeited with a settlement amount of $271,815, an insurance firm breached the sanction compliance against North Korea by providing the subject P&I (Protection & Indemnity) insurance, in 2015.

Weakening the global efforts in combating anti money laundering (AML) and combating financing of terror (CFT), the financial firms such as insurance market upon failing to comply with the sanction regime paid around $14 billion of monetary penalties by both US and UK jurisdictions since 2010. The insurance firms not being exempted from regulatory requirements, have legal bounds to fulfill the compliance needs set by HMT (Her Majesty’s Treasury) and OFSI (Office of Financial Sanctions Implementation) in the UK and OFAC (Office of Foreign Assets Control) in the US.

The enforcement of sanction compliance and in-place sanction check list policies is crucial for the financial firms to contribute in a fight against global financial crimes.

Sanctions Regulations and Lists

Being an integral facet of foreign policy and ceasing the unacceptable conduct of powerful authorities and individuals, sanctions are aimed to limit the cross-border financial and other economic activities by the subject to sanctions. In efforts to achieve the limitations and fight the execution of its enabled activities, regulatory bodies of powerful economies make sure to bell the cat by enforcing jurisdictions from all across the world to comply with the set guidelines and regulations in their conduct of businesses. Governing the sanctions program, the US Department of Treasury develops and maintains a SDN list which contains names of specially designated nationals and blocked persons. The sanction list guideline enables the institutions to employ a compliance program against the entities mentioned in the list. Below are some questions you might ponder to get an answer for.

How to Check the Sanction List?

Aiming to ease the implementation of the sanction compliance program for everyone, OFAC has developed a free search tool against sanctioned entities which can be accessed here.

When to Check the Sanction list?

Institutions and businesses are encouraged to conduct a standard due diligence before establishing a business deal with international individuals and businesses and in special cases implementation of enhanced due diligence is recommended while dealing with politically exposed persons (PEPs) through PEP sanction check. Accommodating the regulatory changes and upgradation in the global sanction lists, regular sanction screening and ongoing monitoring is the way out to stay compliant and prosper in the global community.

Key indicators showing when to perform sanction list checks including customer onboarding, business

In spite of a diversified regulatory framework and sanction compliance guidelines, the financial institutions face serious challenges in the active implementation of these legislations aimed to mitigate cross-border financial risks, giving birth to a need for consolidated solutions to tackle these challenges.

Globalization & Hindrance to Sanction Compliance

Undermining the effectiveness of sanction check, below are some of the factors if not overcome, can cause the institutions a higher risk of compliance.

Data Sharing & Cross-Border Collaboration

An efficient and timely sanction compliance requires the access to cross-border financial and ownership data to identify the money laundering and its actors. Access to beneficial ownership information (BOI) is restricted to specific recipients to maintain privacy protocols, ruled by FinCEN as a continuation of its CTA (Corporate Transparency Act) ruling. With an increased risk of data breach and reputational risks, many jurisdictions have variant rules for accessing the data which can be a hurdle in employing robust sanction screening and its associated money laundering risks.

Compliance Priorities & Resource Constraints

When we talk about cross-border financial risks and globalization, it will be unfair to not highlight the global trends of countries particularly developing, where the placement of compliance and its articulate nature on the development agenda for many governments undermine the AML/CFT needs due to inconsistent approaches of nations. The countries placed in the FATF grey list failed to comply with AML/CFT regulations because of their limited resources which are preferably utilized to build the infrastructure of the country rather than chasing the financial crime executors. Additionally, the outdated systems to conduct screening and limited education culture limits the institutions in employing sanction compliance.

Divergent AML/CFT Rules

Conducted in 2021, the survey on FATF standards implementation shows the impact of divergent AML/CFT rules on the efficiency of cross-border payments in terms of increased cost, and inhibited speed and transparency. It also highlighted that the employment of financial sanction screening is the second biggest obstacle in AML/CFT compliance after identifying and verifying owner beneficial information. The equivocal nature of regulations in various jurisdictions hinders the implementation of AML compliance.

Emerging Technologies & Compliance Aid

Virtual nature of assets and evolved transactional ways hidden behind sophisticated methods such as CaaS (crime as a service), cryptocurrency, and apps like Uber and AirBnB are being exploited for money laundering purposes. With the emergence of technology in facilitating the  financial systems through swift payments, it has also empowered crime actors to launder their illicit gains through decentralized and difficult to track flows. Bridging the tech gap in the form of updated processes and tools is the need of the hour.

a brief visual representation of factors impacting the sanction check efficiency including divergent AML/CFT rules, data privacy and sharing, resource constraints, and tech gaps to fetch the criminal acts.

Ensure Sanction Check with AML Watcher: A Consolidated and Simple Solution

With a research and innovative mindset, the said challenges are needed to be addressed for a compliant culture. To meet the goal, AML Watcher offers you a simple yet efficient solution for your business customized needs whether it’s to navigate PEP risks or filter the sanction entities, we got it all covered. The extensive and continuously updating database of AML Watcher allows you to meet the divergent AML standards and regulations while our research oriented task force empowers the sanction check tool to bridge the gap of tech and evolving crimes.

With a simplified and user-centric interface, our sanction check meets the evolving tech and regulatory requirements your business needs while maintaining a structured audit and documentation trail to keep everything under your control.

Let’s stay ahead of the financial crimes with a sense of accountability and make the right decisions at the right time. Contact us to learn more about AML Watcher and its revolutionary vision to make AML easier than ever.

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