Pragmatic Strategies to Manage Sanctions Compliance Risk

Transcription

1 Pragmatic Strategies to Manage Sanctions Compliance Risk Joel Amy, B.Sc., LL.B., CAMS SVP Financial Crime Compliance & Chief AML Officer, Canada Macquarie Group

2 Session Overview This session is organized into the following parts: General overview of sanctions measures, including what they are, why and how they re applied, and outlining key principles Identification of sanctions risk triggers related to clients, counterparties and transactions, that could potentially expose your institution to sanctions violations Interactive case studies to assist in applying your knowledge Consideration of hot topics in Canadian and U.S. sanctions measures

3 The costs of getting it wrong are significant Financial institutions have faced significant fines and penalties for sanctions violations over the past few years. Some of the more recent and larger fines include: And these fines do not reflect the complete picture, there is still: Cost of remediation Reputational damage Personal liability for individuals

4 Sanctions Overview WHAT are sanctions? Legislation, regulation or other binding instruments that prohibit or restrict dealing with certain countries, governments, groups, entities or individuals. WHO makes them? Multinational bodies and national governments, including the United Nations, the European Union, Canada, the United States and the United Kingdom, among others. All UN member states are obliged to implement United Nations Security Council (UNSC) sanctions domestically. WHY are they implemented? Sanctions are aimed at deterring threats to international peace and security and bringing about a change in the policy or activity of the targeted country, government, entity or individual.

5 How are sanctions applied? Sanctions programs vary by country and situation but will typically fall into one or more of the three categories below: Comprehensive country sanctions prohibit nearly all activity with the sanctioned country and persons in that country, including its government, government controlled entities, nationals and private companies List based sanctions target named individuals, entities or vessels and usually prohibit all activity with the sanctions target. Such targets are referred to as Specially Designated Nationals (SDNs) under U.S. sanctions and Designated or Listed Persons under other sanctions programs Sectoral sanctions prohibit specific activity involving a targeted sector or group within a country or region. For example, current Canadian, U.S. and E.U. sanctions against Russia target its finance, energy and defence sectors

6 Some Key Principles Any entity that is 50% or more owned or controlled by one or more sanctioned person is also considered sanctioned without having to be specifically named in any sanctions list Sanctions can have extra-territorial application, i.e. apply outside the country that implements them. For example, they apply to citizens and residents wherever located and to transactions in the currency of the implementing country. In some cases sanctions can also be made to apply to foreign persons. Sanctions can be breached by directly engaging with a sanctioned person or entity or undertaking prohibited activity (direct sanctions risk) OR by facilitating client activity prohibited by sanctions measures (indirect sanctions risk)

7 Relevant Sanctions Regimes Pragmatic risk management requires your compliance framework to consider various sanctions regimes Domestic Local Global? Within Canada and abroad In the countries in which your institution operates or conducts business With the sanctions programs of certain key jurisdictions (i.e. US, EU, UK)

8 Canadian Sanctions The Canadian sanctions regime is overseen by by Global Affairs Canada and is enacted domestically under the following pieces of legislation: - United Nations Act - Special Economic Measures Act - Freezing Assets of Corrupt Foreign Officials Act - Export and Imports Permits Act - Immigration and Refugee Protection Act - Criminal Code The administration of Canadian sanctions is complicated and involves Global Affairs Canada, Department of Justice, RCMP, CBSA, OSFI, IIROC, CSIS, Immigration, Refugees and Citizenship Canada (IRCC) and Department of Finance Canadian sanctions apply to all persons in Canada and all Canadians outside Canada, including legal entities formed under the laws of Canada or a province

9 Canadian Sanctions: Ministerial Directive Power While not technically considered part of the Canadian sanctions regime, PCMLTFA amendments that came into force in 2014 provide authority to the Minister of Finance to issue directives which could have similar effect The Minister has not yet exercised this authority, but it allows him or her: (i) to issue written directives that require reporting entities under the PCMLTFA to apply countermeasures to transactions originating from or destined to designated foreign jurisdictions and entities; and (ii) in the most serious cases, to recommend, in consultation with the Minister of Global Affairs, issuing regulations under the PCMLTFA limiting or prohibiting reporting entities from entering into a financial transaction originating from or destined to designated foreign jurisdictions and entities.

10 Canadian Sanctions: Ministerial Directive Power The Minister of Finance may only issue a directive if: (i) an international body or organization has called on its members to take measures on the grounds that the foreign jurisdiction or entity s AML or CTF measures are ineffective or insufficient OR (ii) the Minister is of the opinion that the ineffectiveness or insufficiency of the jurisdiction or entity s AML or CTF measures could cause an adverse impact or reputational risk to the integrity of Canada s financial system The text of any directive would be communicated by FINTRAC and also published in the Canada Gazette. The date upon which a directive would come into force would be specified in the directive. Directives remain in force until officially revoked, suspended or amended.

11 U.S. Sanctions: What is OFAC? The Office of Foreign Assets Control (OFAC) an agency of the U.S. Department of Treasury responsible for administering and enforcing U.S. sanctions measures OFAC exercises broad jurisdiction over persons and activities in executing its mandate to enforce applicable U.S. sanctions measures. OFAC is well funded and zealous in its enforcement activities. U.S. sanctions measures apply to U.S. Persons, U.S.-origin goods, and U.S. connected transactions and activities

12 U.S. Jurisdictional Hooks: What is a U.S. Person? U.S. Persons include: U.S. citizens and permanent residents worldwide (i.e. regardless of whether residing in the U.S.) All individuals physically located in the United States, regardless of citizenship Legal entities domiciled in the United States (e.g. corporations, partnerships, etc.), including U.S. branches and offices of non-u.s. banks Non-U.S. branches of U.S. banks In certain cases, non-u.s. entities that are U.S. owned or controlled

13 U.S. Jurisdictional Hooks: U.S. connected activities Even if you are NOT a U.S. person, U.S. sanctions will apply to your activities if they are connected to the U.S., including: all USD denominated transactions and payments transactions or activities involving U.S.-origin goods transactions or activities to, from or through the United States

14 Country Sanctions Programs Comprehensive Sanctions Iran North Korea Sudan Syria Cuba Crimea Sectoral Russia Targeted Sanctions Afghanistan Belarus Burma (Myanmar) Burundi Central African Republic DR Congo Egypt Eritrea Iraq Lebanon Libya Republic of Guinea Republic of Guinea- Bissau Somalia South Sudan Tunisia Ukraine Venezuela Yemen Zimbabwe

15 Risk Triggers Positive Screening Matches What to look for? Matches against the client, counterparty, vessel or a related party that cannot be discounted Matches involving previously sanctioned persons or entities Vessels calling at ports in comprehensively sanctioned jurisdictions Ownership Structure Shareholder, UBO or controller of the client, counterparty or vessel is: vsanctioned; or vincorporated, domiciled or located in a comprehensively sanctioned jurisdiction or a jurisdiction subject to sectoral sanctions The % shareholding is irrelevant Commercial or Economic Ties Client or counterparty has operations, customers, suppliers, agents, subsidiaries, branches, JV s, investments or other assets in comprehensively sanctioned countries or countries subject to sectoral sanctions Where to look? Sanctions or adverse news screening results Sanctions or adverse news screening results Shareholders/directors registers Financial statements or other continuous disclosure Dunn & Bradstreet reports (or similar) Your firm s internal country risk list Financial statements, continuous disclosure, client website, press releases, Dunn & Bradstreet reports (or similar), etc.

16 Also be aware of Where a combination of the following risk triggers is identified in relation to a client or counterparty, you should be alert to the presence of any direct links to sanctioned countries or persons, that would warrant further investigation: Neighbouring Countries Countries with Commercial ties Higher Risk Activities Client or counterparty carries on business in countries neighbouring comprehensively sanctioned jurisdictions Client or counterparty is incorporated in a country with known commercial ties to comprehensively sanctioned countries Client or counterparty is involved in sectors or activities considered higher risk from a sanctions perspective Example Countries neighbouring Iran include Turkey, Azerbaijan, UAE and other Gulf States Where to look? Financial statements, continuous disclosure, client website, Dunn & Bradstreet reports (or similar) etc. Example Countries with known commercial ties to Iran, include: Turkey, UAE and other Gulf states China, India EU countries like Germany, Greece, Italy, Austria and Switzerland Where to look? Financial statements, continuous disclosure, client website, Dunn & Bradstreet reports (or similar) etc. Example Energy (oil & gas) Defence Commodity traders Shipping Where to look? Financial statements, continuous disclosure, client website, Dunn & Bradstreet reports (or similar) etc.

17 Identifying Risk Triggers: Case Study 1 Your firm s commodities trading desk requests you to on-board a new client, Happy Rainbow Trading (HRT). You establish the company is a privately owned oil refinery located in India. After reviewing the company s financial statements and website, you identify that the company imports certain amounts of crude oil from the National Iranian Oil Company (NIOC). Poll Question 1: Which of the following is a sanctions risk trigger that warrants further assessment: (a) The company is privately owned and has a suspicious name; (b) The company operates an oil refinery in India; (c) The company imports crude oil from NIOC; (d) Both (b) & (c)

18 Identifying Risk Triggers: Case Study 1 While establishing the ownership structure of HRT you identify that RuvOil, a Russian state-owned oil company, is in the process of acquiring a 51% shareholding in HRT. You further establish from screening that RuvOil is a sanctioned entity. Poll Question 2: Does the pending acquisition by RuvOil present sanctions risk exposure to your firm? (a) Yes (b) No Poll Question 3: Would your answer change if RuvOil was NOT a sanctioned entity? (a) Yes (b) No

19 Identifying Risk Triggers: Case Study 2 Your firm s lending business wants to extend a USD loan to a German based company with offices in Berlin and New York. You discover that a portion of the loan may be used to fulfil a contract the company has been awarded to provide energy meters to a utility company owned by the Iranian government. The German company s EU legal counsel has confirmed in writing that fulfilling the contract would not violate EU sanctions. Poll Question 4: Citing the EU legal counsel advice, and the fact that the company is based in Germany, your internal business contact advises the transaction is good to go from a sanctions risk perspective. Do you agree? (a) Yes (b) No

20 Identifying Risk Triggers: Case Study 3 Your firm s investment funds division wants to on-board a European-based company as an investor into one of its funds. While ascertaining the company s ownership structure, you establish it is used as a private investment vehicle for a Russian oligarch, who holds a 30% interest in the company. You conduct screening on this beneficial owner and identify that he is sanctioned by OFAC. Poll Question 5: Your contact in the business says that because the Russian oligarch s shareholding is well below the 50% threshold, you should not be concerned from a sanctions perspective. Do you agree? (a) Yes (b) No

21 Looking Forward: Canadian Sanctions In April 2017, a Canadian Senate Committee the Standing Committee on Foreign Affairs and International Development published its report entitled, A Coherent and Effective Approach to Canada s Sanctions Regimes: Sergei Magnitsky and Beyond The report was the culmination of the Senate s mandated review of the Freezing Assets of Corrupt Foreign Officials Act and the Special Economic Measures Act The review was conducted via 15 meetings with sworn testimony provided by 42 individuals, including professors, industry practitioners, regulators, law enforcement, border services, citizenship & immigration, among others

22 Looking Forward: Canadian Sanctions The report set out 13 recommendations to the Government of Canada to improve the Canadian sanctions regime, including to: ensure the different pieces of Canadian sanctions legislation operate in a complementary and coherent manner provide comprehensive, publicly available written guidance on sanctions compliance create a consolidated Canadian sanctions list The report stopped short of formally recommending the creation of a separate agency to handle the administration and enforcement of Canadian sanctions measures (akin to OFAC), but it did recommend the Government, should properly resource and reform the structures responsible for its sanctions regime and stated that: [T]he implementation of sanctions measures and by extension the effectiveness of Canada s sanctions regimes can be greatly improved by recognizing the need to create a dedicated section that acts as a domestic regulator for sanctions measures

23 Looking Forward: Canadian Sanctions New draft sanctions against Iran currently making its way through the Senate (Committee report presented on April 4, 2017): [while the adoption of the JCPOA] calls for the scaling back of nuclear related sanctions against Iran, terrorism and human rights violations emanating from Iran continue to occur and sanctions to deter such conduct must be strengthened and maintained

24 Looking forward: U.S. Sanctions Russia Despite pre-inauguration concerns that the Trump administration would ease sanctions against Russia unilaterally, the E.U. and U.S. have since reconfirmed any easing of sanctions against Russia is dependent on its full implementation of the Minsk agreements and its withdrawal of support for separatists in Ukraine As confirmation of continued U.S. stance on Russia sanctions, the U.S. recently denied ExxonMobil s application for waiver from U.S. sanctions. ExxonMobil had been seeking to resume an oil venture with a large Russian conglomerate close to Russian President Vladimir Putin

25 Looking forward: U.S. Sanctions Iran Joint Comprehensive Plan of Action (JCPOA) was agreement among Iran, P5+1 and E.U. concerning Iran s nuclear program and easing sanctions Even after other jurisdictions eased Iranian sanctions after JCPOA Implementation Day on January 16, 2016, OFAC s primary sanctions and U.S. export control regulations continued to apply to any Iran-related transactions involving U.S. nexus President Trump had harsh criticism of the JCPOA during his campaign, calling it the worst deal ever negotiated On April 18, 2017, the U.S. State Dept. certified to Congress that Iran was in compliance with its obligations under the JCPOA, but that Iran remained a leading state sponsor of terror and the U.S. would review its involvement in the JCPOA As of May 3, 2017, the U.S. Senate Foreign Relations Committee was pushing through a bill for additional sanctions against Iran for the development and use of ballistic weapons, support for terrorism and human rights violations

26 Looking forward: U.S. Sanctions North Korea (DPRK) Tension between the U.S. and DPRK has steadily escalated since President Trump assumed office on January 20, 2017 DPRK has since fired several missiles in violation of existing UN sanctions In April 2017, President Trump declared that the U.S. would be willing to go it alone to restrain North Korea s nuclear weapons program In May 2017, President Trump called Kim Jong-Un a smart cookie and stated he would be honored to meet with him under the right circumstances On May 3, 2017, Secretary of State Rex Tillerson said the U.S. was working on more sanctions targeting DPRK depending on its actions

27 Looking forward: U.S. Sanctions Venezuela The U.S. has existing sanctions measures against Venezuela targeting individuals for drug trafficking and human rights violations resulting from anti-government protests in 2014, as well as against certain sanctions against state owned oil company PDVSA over trade with Iran On May 3, 2017, Venezuelan President Nicolas Maduro announced he would seek to rewrite the country s constitution critics have condemned the move as a power grab and the U.S. announced it may consider new sanctions in response

28 Conclusion & Takeaways Sanctions measures will continue into the foreseeable future as a tool used by governments to pursue various foreign policy objectives Stay abreast of international political developments to assist in anticipating potential geographic and other targets of future sanctions measures Formally include sanctions risk as part of your firm s inherent risk assessment process Integrate sanctions compliance measures into your broader financial crime compliance management framework, including via training, creation and maintenance of an internal country risk list and as part of initial onboarding and ongoing monitoring processes

29 Questions? Joel Amy, B.Sc., LL.B., CAMS SVP Financial Crime Compliance & Chief AML Officer, Canada Macquarie Group