How do you know if your sanctions compliance program (“SCP”) is really working? Can your firm really afford to find out the hard way – violations with major penalties, especially after regulators uncover your management did not sufficiently invest in the right people, processes, and/or technologies to filter, freeze, and report targeted assets?
As we witness the Russian military assault in (and tremendous courage of) Ukraine, and its citizens, the West is responding with major financial sanctions to freeze assets and payments against Russian entities, activities, and individuals including President Putin. Additionally, SWIFT prohibitions against selected Russian banks are now in place, to further reduce money flows for Russia and its agent states.
Unfortunately, Now is NOT the Right Time to Health-Check Your SCP
Your compliance and operations staff are likely stressed and over-worked because they’ve worked 24/7 to execute these sanctions – and are on call for the next round(s) against Russia. Indeed, your SCP program should always be in robust health because you and your company should be benchmarking and adapting continuously against leading- and expected compliance practices.
OFAC’s Five Components of an Effective Sanctions Compliance Program
As a reminder, the US Treasury Office of Foreign Assets Control (“OFAC”) issued its “Framework for OFAC Compliance Commitments” in May 2019 . It’s important to benchmark against the framework’s five key components: (1) management commitment; (2) risk assessment; (3) internal controls; (4) testing and auditing; and (5) training.
Management commitment is the most important.
1. Management Commitment
Isn’t this always the case, and hopefully not a surprise, how important management commitment and culture is – especially to OFAC and other regulators which discover, investigate, and then enforce major penalties for sanctions violations. Easy to say, very difficult to demonstrate the right culture.
OFAC expects senior management to:
If your firm is global, are your filtering tools and processes enabling you to globally filter, block, and report consistently, fully and timely? What if your SCP program and tools work well in one geography, but not universally, unintentionally allowing Russian (or other) assets to slip through?
2. Risk Assessment
Risks in sanctions compliance are potential threats or vulnerabilities that, if ignored or not properly handled, can lead to OFAC and other violations, negatively affect your reputation and worse, enable evasion. Take a risk-based approach when designing or updating a SCP. Ongoing “risk assessments” should identify potential OFAC issues and should drive your SCP procedures, internal controls, and training to mitigate such risks.
Risk assessment examples include: (i) customers, supply chain, intermediaries, and counterparties; (ii) your products and services, including how and where they fit into other financial or commercial products, services, networks, or systems; and (iii) how the interaction of (i) and (ii) can exacerbate these risks further.
3. Internal Controls
Effective SCPs include internal controls, such as policies and procedures to identify, interdict, escalate, report, and keep records pertaining to prohibited activity by OFAC and others. Internal controls to outline clear expectations, define procedures and processes (including reporting and escalation chains), and minimize the risks identified by your sanctions risk assessments.
For example, are roles crystal clear for your 1st line operations, businesses, 2nd line compliance, and management so that decisions to block, freeze and report Russian (or other) assets are time-critically met? What if they’re not? How would you know?
4. Testing and Auditing
Compliance and internal audits assess the effectiveness of current processes and check for inconsistencies between these and day-to-day operations. Objective testing of your SCP ensures you can identify program weaknesses and deficiencies, especially software, systems, and other technology. And you must remediate any identified compliance gaps promptly and fully across your enterprise.
Like many other compliance requirements, training for employee awareness and execution is critical. Violations due to lack of awareness is inexcusable and can be fatal.
I’ve seen the good, the bad and the ugly of sanctions and other compliance programs over intensely stressful times in the world. Iraq invading Kuwait; 9/11; the fallout, remediation, and transformation from painfully expensive sanctions penalties; the Russian incursion into Crimea; and now Ukraine.