Financial Sanctions in the Funds Sector and EMIR Update

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1 CPD Code: Financial Sanctions in the Funds Sector and EMIR Update Niamh Lynn, Manager of EMIR Unit, Securities and Markets Supervision Division Central Bank of Ireland Conor O Donnell, Senior Compliance Manager, The Citco Group of Companies

2 EMIR ACOI presentation 27 April 2017 Niamh Lynn, Manager, EMIR Unit, Securities & Markets Supervision Division Central Bank of Ireland - UNRESTRICTED

3 Agenda Overview of EMIR Requirements Regulatory Use of EMIR Data Data Quality Initiatives Findings and Outcomes Key Actions for Counterparties Current Developments on EMIR reporting Margin for Uncleared OTC transactions Central Bank of Ireland - UNRESTRICTED

4 EMIR Requirements EMIR Requirements NFC- NFC+ FC Reporting Yes Yes Yes Clearing No Yes Yes Margin for uncleared OTCs No Yes Yes Risk Mitigation Techniques for non-centrally cleared OTC trades Timely confirmation Yes Yes Yes Portfolio Reconciliation Yes Yes Yes Dispute Resolution Yes Yes Yes Portfolio Compression Yes Yes Yes Daily Valuation No Yes Yes Central Bank of Ireland - UNRESTRICTED

5 EMIR Data Regulatory Uses Network analysis using EMIR Credit Default Swap Data Data Gaps and Shadow Banking Profiling Special Purpose Vehicles in Ireland Supplementing FC returns Irish CDS Network Net Notional Outstanding Central Bank of Ireland - UNRESTRICTED

6 Data Quality Initiatives Rejection reports Reconciliation reports Review of data quality of key fields ESMA Data Quality Action Plan EMIR Regulatory Returns 250, , ,000 Weekly Rejections ,000 50,000 0 Central Bank of Ireland - UNRESTRICTED

7 Findings & Outcomes Governance Concerns Delegation of reporting Operational/System Concerns Absence of reconciliation LEI & UTI verification Counterparty Status Buy/Sell Indicator INDUSTRY FEEDBACK LETTER Operations Systems Governance Central Bank of Ireland - UNRESTRICTED

8 Key Actions for Counterparties Pre-reporting agreement Post-reporting reconciliation Central Bank of Ireland - UNRESTRICTED

9 Current Development - Reporting Amended RTS and ITS on Reporting Amendments to data fields New requirements Applies from 1 November Back loading from 10 February 2017 Central Bank of Ireland - UNRESTRICTED

10 Variation Margin Daily settling of bilateral P&L One way payment of cash or securities Challenges Treasury Function Operational Initial Margin Prepayment of expected losses in the event a counterparty defaults Two-way segregated payment of cash or securities Challenges Legal Operational Systems Governance Central Bank of Ireland - UNRESTRICTED

11 BILATERAL MARGINING START DATES OTC Derivatives (incl. IGTs) in Billions: Feb Mar Sep Sep Sep Sep >3000 >2250 >1500 >750 >8 <=8 IM req. does not apply. Start Date for Exchange of: IM VM IGTs are exempt for 6 months. Different counterparty categories => the later date. 11

12 Questions? CONTACT DETAILS FOR FURTHER QUERIES: Central Bank of Ireland - UNRESTRICTED

13 Financial Sanctions Funds Industry Conor O Donnell Senior Compliance Manager Citco

14 AGENDA Sanctions Sanctions What can go wrong What are Sanctions Role of Central Bank Obligations Financial Sanctions Terrorist Financing OFAC Impact on Funds Potential Challenges & Gaps Central Bank Expectations Approach to Financial Sanctions

15 Sanctions Compliance with domestic and international sanctions regimes has become one of the main regulatory challenges Greater enforcement of financial sanction provisions and record breaking fines Significant reputational damage Increased expectation of Regulators on firms to manage their sanctions risk Firms and Compliance Officers need to manage / monitor potential exposure based not only on the conduct of their own company but also on the conduct of their clients. Expect firms to have in place effective systems and procedures for minimising the risks associated with financial crime. This includes a requirement for effective measures to manage the risks associated with financial sanctions. 15

16 Sanctions What Can Go Wrong March 2015 Commerzbank fined $1.45 billion to settle charges over transactions with sanctioned companies in Iran and Sudan. June 2014 BNP Paribas was fined a record $8.9 billion with respect to claims that it violated sanctions against Sudan, Cuba and Iran. 16

17 What are Sanctions Sanctions Financial Sanctions Targeted Financial Sanctions Comprehensive Sanction Programmes 17

18 What are Sanctions Sanctions are an instrument of a diplomatic or economic nature which seeks to bring about a change in activities or policies, such as violations of international law or human rights or policies that do not respect the rule of law or democratic principles Sanctions are restrictive or coercive measures implemented by international bodies such as the United Nations ( UN ), the European Union ( EU ), HM Treasury ( HMT ) and the US Office of Foreign Assets Control ( OFAC ) Financial Sanctions are restrictive measures imposed on individuals or entities in an effort to curtail their activities and to exert pressure and influence on them. Financial sanctions are primarily concerned with curtailing the movements of payments and capital Financial sanctions are political measures taken to restrict the movement of funds to achieve a specific outcome. Targeted Financial Sanctions are a specific type of financial sanction with a stated objective, one of which is the prevention of terrorist financing 18

19 What are Sanctions Targeted Financial Sanctions - can originate at the supranational level (EU) or international level (UN) - clear obligation to comply with EU Council Regulations - have regard to the designation of persons and entities by the United Nations Security Council Sanctions Committees in the terrorist financing context - The EU gives legal effect to Targeted Financial Sanction designations by the UN Sanctions Committees through EU Council Regulations Once a person or entity is designated by the UN Sanctions Committees, it is intended that funds or other assets are frozen without delay and not made available directly or indirectly to that sanctioned individual or entity 19

20 What are Sanctions Comprehensive sanction programmes focus on restrictions dealing with entire countries. Can restrict all trade and monetary transactions with very few limited exceptions Sudan, North Korea, Syria, Crimea, Cuba and Iran (easing of certain sanctions) Prohibited from dealing with - governments - persons resident - providing / receiving goods services - providing / receiving financial services 20

21 Role of Central Bank The Central Bank is responsible for financial regulation in Ireland. It is one of three competent authorities in Ireland for EU financial sanctions and is responsible for the administration, supervision and enforcement of financial sanctions in Ireland The Central Bank s role: - enforces the financial sanctions - can give direction or issue instruction to a financial institutions as it deems necessary The other two Competent Authorities are the Department of Foreign Affairs and Trade and the Department of Jobs, Enterprise and Innovation 21

22 Obligations Financial Sanctions There is a legal obligation to comply with EU Council Regulations relating to financial sanctions as soon as they are adopted Once a person or entity has been sanctioned under EU Financial Sanctions, there is a legal obligation not to transfer funds or make funds or economic resources available, directly or indirectly, to that person or entity In other words freeze assets Where you have an exact match or are not in a position to discount the name matched freeze assets and contact Central Bank There is an obligation on financial institutions to ensure that they are compliant with financial sanctions, which includes the ongoing monitoring of transactions. To ensure compliance with financial sanctions, it is necessary to monitor both the EU Financial Sanctions list and the UN Sanctions Committees list relating to terrorism and the proliferation of weapons of mass destruction 22

23 Obligations Terrorist Financing Targeted Financial Sanctions are a specific type of financial sanction with a stated objective, one of which is the prevention of terrorist financing Under the CJA 2010, fund service providers are required to take measures to prevent terrorist financing and must adopt measures to prevent terrorist financing commensurate with the risk The preventative measure for AML and CFT are the same but will be applied at times in different ways In the event that a client / investor is matched to either the EU terrorist lists or UN terrorist lists, the fund service provider should file an STR immediately with the Garda Bureau of Fraud Investigation Where a person or entity is also listed in an EU Council Regulation relating to terrorism, there is a legal obligation to immediately freeze that person or entity s account 23

24 Other Financial Sanction Regimes - OFAC Financial sanctions imposed in the US have extra territorial effect and may have to be considered even where you are not incorporated or operating in the United States The Office of Foreign Assets Control (OFAC) enforces economic and trade sanctions based on US foreign policy and national security goals against targeted foreign countries and regimes, terrorists, international narcotics traffickers, those engaged in activities related to the proliferation of weapons of mass destruction, and other threats to the national security, foreign policy or economy of the US As part of its enforcement efforts, OFAC publishes a list of individuals and companies owned or controlled by, or acting for or on behalf of, targeted countries. It also lists individuals, groups and entities, such as terrorists and narcotics traffickers designated under programs that are not country-specific. Collectively, these individuals and companies are called Specially Designated Nationals (SDNs). Their assets are blocked and persons and businesses are generally prohibited from dealing with them Screening in Ireland would normally encompass OFAC lists 24

25 Impact on Funds Ensuring that appropriate sanctions risk management procedures are in place in relation to transactions in securities and administration of funds The potential implications when a sanctioned investor is identified, or when it is established that a fund has traded in securities in a company which may be linked to financial sanctions Obligations include ensuring that the Fund is not engaged with prohibited investors or investments. Issues are likely to arise where a fund and / or fund service provider does not have existing processes to screen and re-screen investments and investors Possible links to Liability - sanctioned activities - targeted investment owned or controlled by a sanctioned party - located / linked to a sanctioned jurisdiction 25

26 What Are The Challenges & Potential Gaps The continued and increased use of sanctions as a response to geopolitical issues Financial Sanctions and related AML challenges will continue to grow in complexity Need to react promptly for ongoing changes in sanctions Interpretation / application of Sanctions legislation can vary. Russia / Ukraine sanctions is not a complete prohibition Screening systems and interface with client database. Screening software is only as good as the data available to it. Poor / inaccurate data can result in significant increase in false positives or more critical, fail to identify potential or true sanction matches Application of filtering thresholds, testing and amending as deemed necessary Appropriate training for staff Panama Papers 26

27 Potential Gaps identified by Central Bank Financial Sanction procedures do not contain sufficient detail for investigating and discounting a potential match. Can result in inconsistencies and approach not documented Does ongoing screening include persons and/or entities associated with that sanctioned person Is screening limited to sanction list updates and changes to client data. Screening should be conducted on complete client data base against complete Financial Sanction list on a regular basis Where Good Guy lists maintained how often reviewed to ensure no change Evidence of system assurance testing and frequency 27

28 Central Bank Expectations Firms should devise and implement policies, procedures, systems and controls, to facilitate adherence to their obligations in relation to Financial Sanctions Regulations Should include the implementation of appropriate Financial Sanctions screening mechanisms and procedures for the escalation and management of any potential Financial Sanctions matches Firms will determine the appropriate frequency of on-going screening required, aligned to a documented risk assessment of potential FS exposure Expects that firms three lines of defence model would incorporate appropriate consideration and review of Financial Sanctions processes and procedures 28

29 Approach to Financial Sanctions Policy Implementation of a Sanctions Policy at Group and local level. A sanctions risk assessment should be completed to assess potential Financial Sanction exposure and used as a base for producing standards and procedures What should be included in policy (not exhaustive list): - Risk Assessment / Risk Appetite - Sanction screening methodology - Prohibited activity - Restricted business activity targeted sanction programmes - Investigation / blocking process - Reporting and escalation process - governance structure - roles and responsibilities 29

30 Approach to Financial Sanctions Risk Assessment Risk Assessment - business strategy / model - type of client / investor - geographical exposure - method of distribution - transaction types / frequency - CDD process - knowledge / training - control structure - governance structure 30

31 Approach to Financial Sanctions Screening Ensure the implementation of appropriate Financial Sanction screening tools, frequency and ongoing review Implement defined parameters for screening including documented process for reviewing and discounting false positives Have appropriate escalation processes in place for potential matches Is it possible to reduce false positives claimed DOB can reduce false positives by 50% to 90% Deciding what lists to screen against Requirement to screen all related parties signatory list? 31

32 Approach to Financial Sanctions Ensure training and appropriate resources are applied Detailed MI should be included in MLRO reports to Board, senior management 32

33 In Conclusion Increasing regulatory focus Significant fines Changing geopolitical landscape Need for robust policy and risk assessments Reliance on technology 33

34 Questions? 34