Global Program vs Regional Authority: EU and US perspective. June 9, 2016

Transcription

1 Global Program vs Regional Authority: EU and US perspective June 9, 2016

2 Table of Contents 1. Sanctions Program: Regional vs. Global 2. EU and US Sectoral Sanctions 3. Regulatory Framework and Expectations 4. Compliance with SSI: Front Office 5. Compliance with SSI: Compliance 6. Compliance with SSI: Possible Screening Rules

3 Sanctions Program: Regional vs. Global

4 1. Sanctions Program: Regional vs. Global Recent changes in sanctions programs (for example, Cuba, Iran, North Korea) and US regulatory expectations have reinforced the need for international financial institutions to evaluate the scope and geographical reach of their sanctions programs. Some notable differences between the EU and the US in the easing of certain sanctions and restrictions against Iran highlight possible conflict of laws issues faced by international financial institutions. Because of the more complex conflicting jurisdictional requirements, these institutions should have central oversight in place to identify any potential conflicts between jurisdictional requirements and set policies and procedures to handle these conflicts. Historically, sanctions compliance programs have been decentralized with responsibilities being distributed among different departments and within an organization. When departments do not actively collaborate, the business often misses the big picture, and compliance resources and technology are often used inefficiently. Moving to a global model improves the effectiveness and efficiency of sanctions compliance programs. To further mitigate any sanctions risk emerging from, but not limited to, possible conflict of laws issues, industry standards (and regulatory expectations) move toward a global sanctions compliance program. Most financial institutions that have been recently penalized for US sanctions violations operated with a decentralized program with disparate approaches to sanctions compliance, and as a result are now centralizing their programs. Global programs have now become the de facto industry standard, and financial institutions that deviate from this standard will be scrutinized closely by regulators when remediating sanctions issues.

5 1. Sanctions Program: Regional vs. Global Advantages of a global sanctions program Centralization of policy and standards is necessary to keep up with the increasing globalization and evolving regulatory expectations for sanctions compliance; for example, it is very difficult for firms to implement policies that take into account different jurisdictional approaches without having a centralized team. Financial institutions with central oversight: Are able to set the tone from the top (key element for US regulators) Implement a strong compliance culture in all jurisdictions Create an holistic view of the risks / Global Risk Assessment Design and deliver the necessary controls Optimize sanctions technology solutions Additionally, having a primary sanctions team in one location improves efficiency by eliminating the need for the same functions to be replicated in several locations. Implementing a global model requires standardization across the organization, which will be a significant lift for larger firms. Key aspects of a global approach include: Determining a global policy standard to be implemented throughout the organization Appointing an experienced sanctions compliance officer Ensuring a centralized team responsible for managing the global sanctions program and overseeing its operation Developing breach reporting procedures to speed up incident response management Training across applicable lines of business

6 Screening of Sectoral Sanctions

7 Regulatory Framework and Challenges Financial institution must comply with EU and US regulations on SSI. There is no maybe, there is no later, there is no partially. US authorities, including OFAC, are investigating and building cases against non-compliance with SSI requirements. Challenges and Operational impacts There is no single best way Financial Institutions screen transactions for compliance with Sectoral Sanctions. Some financial institutions limit screening to specific fields in payment messages that should detail the role of an SSI entity in that transaction, while others screen all fields of payment messages for mention of SSI entities. Financial institutions should also consider screening trade activities. Regardless of screening decisions, all alerts must be escalated to the appropriate Compliance personnel for analysis. While it is not possible to identify an estimated percentage increase in the hit ratio (number of SSI-related alerts / number of transactions processed). Based on the results from US and EU banks an increase between 2% to 12% in the hit ratio should be anticipated if transaction screening for EU and US SSI s is implemented. Additional impacts include: - Possible delays in reviewing alerts due to higher volume - Possible delays in processing pending transactions, especially if an RFI process is utilized - Correspondence with the business and potentially with the clients - Consideration for additional resources

8 Compliance with SSI: Front Office # Recommendation Action 1 Maintain awareness of SSI sanctions and the range of harms from non-compliance Receive training from Compliance and retain knowledge gained through Bank communications 2 Keep abreast of customer structure changes that might indicate a new sanctions interest Maintain continuous KYC 3 Obtain Compliance pre-advice for transactions involving SSI entities A pre-advice service can be provided by compliance for local and regional businesses in which contracts and invoices involving SSIs (and possibly bills of lading, ports of loading and certificate of origin especially for export / oil activities) are sent to the relevant Compliance department for review prior to the payment process, to ensure prompt disposition of any potential alerts triggered by the transaction. 4 Escalate uncertain or known attempts of sanctions circumvention Follow Local Compliance Procedures to notify appropriate Compliance personnel of any suspected or confirmed sanctions circumvention attempt

9 Compliance with SSI: Compliance # Recommendation Action 1 Conduct SSI awareness training for Businesses Corporate Compliance should provide appropriate training to Local Compliance, who can present SSI awareness to local businesses and segments 2 Maintain awareness of risk environment, new sanctions activity, and regulatory guidance Compliance Officers should subscribe to regulatory updates and participate in compliance industry activities to maintain adequate understanding of the current environment 3 Coordinate KYC functions with Businesses Compliance should proactively distribute known sanctions designees to Businesses and should be ready and able to assist in sanctions screening during the KYC process 4 Maintain up to date data for customer screening Screening software should be continuously updated to ensure changes are properly reflected 5 Transaction Monitoring Transactions should be screened using all applicable screening lists 6 Provide appropriate feedback to ensure Any found violations must be addressed with responsible Front Office persons and violations are timely addressed and prevented in actions must be taken to educate or otherwise ensure future compliance the future 7 Escalate uncertain or known attempts of sanctions circumvention Follow Corporate Compliance Procedures to notify appropriate Compliance personnel of any suspected or confirmed sanctions circumvention attempt 8 Conduct periodic sampling of transactions to Sampling should be done on transactions to ensure compliance with written Bank ensure compliance with written bank procedures policies regarding sanctions circumvention prevention

10 Compliance with SSI: Possible Screening Rules Activity What to Screen Objective Commercial / Bank to Bank Payments Certain commercial and bank-to-bank messages where a Sectoral Sanctions entity is listed as the Originator or Beneficiary (for example, in MT103 Field 50a Ordering Customer or 59a Beneficiary Customer ) To detect a transaction where value is flowing to or from and an entity under Sectoral Sanctions Trade Finance Certain trade finance documentation (SWIFT MT7xx) To detect a transaction where a sanctioned entity is a party to a Trade Finance agreement that could result in an extension of credit to the sanctioned entity Security Trading Screening ISIN for trading related activities. To detect trading activity that involves prohibited securities or bonds. Free text messaging Free text SWIFT message where an Sectoral Sanctions entity is mentioned anywhere other than fields signifying Originating Financial Institution, Correspondent (Intermediary) Financial Institution or Beneficiary Financial Institution To detect a transaction where value is flowing to or from, or for the benefit of and an entity under Sectoral Sanctions