ACSS - Chapter 6 - Operational Issues PDF

Certified Sanctions Specialist (CSS) 211 OPERATIONAL ISSUES CONTRIBUTING TO AN EFFECTIVE AND EFFICIENT SANCTIONS COMPLIANCE PROGRAM Association of Certified Sanctions Specialists (ACSS) 7950 NW 53rd Street Suite 337 Miami, FL 33166 Phone: +1 305 433 7187 helpdesk@sanctionsassoci...

Certified Sanctions Specialist (CSS) 211 OPERATIONAL ISSUES CONTRIBUTING TO AN EFFECTIVE AND EFFICIENT SANCTIONS COMPLIANCE PROGRAM Association of Certified Sanctions Specialists (ACSS) 7950 NW 53rd Street Suite 337 Miami, FL 33166 Phone: +1 305 433 7187 [email protected] www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 212 Operational Issues: Introduction Effective sanctions compliance involves a number of significant operational issues. These include Resolving standard and complex cases Obtaining, managing, or reviewing licenses Freezing property, and managing frozen property Using contractual clauses to mitigate sanctions risks Outsourcing compliance functions Record keeping The operation of a sanctions compliance system frequently requires interaction with other areas of compliance, especially export controls, anti-money laundering, and anti-corruption. It also requires the compliance function to be aware of, and be prepared to address, forces from the business side that may make compliance with sanctions laws more difficult. Resolving Cases Much of sanctions compliance involves the design, implementation, and maintenance of various systems, such as screening. One of the most important of these “systems” is that for resolving cases. In most instances, such as when screening reveals the presence of a sanctioned party, the decision is clear – the transaction cannot proceed. In some cases, though, the outcome is less obvious. Sanctions may apply to a party, for example, but may not necessarily prohibit all transactions. In these instances, a decision by the compliance function as to whether the transaction can proceed may be necessary. Many of these cases are relatively straightforward. Some, however, can be quite complex. “Standard” cases can typically be resolved within the compliance function. Depending upon the complexity of the issue, the person handling the initial alert may be able to make a decision. More complicated cases may require consultation with others in Compliance. Large banks and other organizations often have both local and group-level sanctions expertise, and especially complicated cases may require a referral to the group’s experts. Especially complicated cases may require even more expertise. At one level, such issues may involve detailed questions regarding the underlying business, such as specific goods or financial services. Understanding these details may well require discussions with the business. On another level, a complicated case may raise difficult legal questions. Answering these question my involve the organization’s legal function. Especially difficult legal questions may even require consultation with outside counsel. Some cases are complicated, not because of the issues involved, but because of their significance to the organization. A given transaction may be legal, but www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 213 engaging in it could raise major issues of reputation. In such cases, senior management may have to make a decision as to whether and how to proceed. Of course, senior management should always act in full compliance with the law. An organization should have clear procedures describing how both standard and complex cases are addressed. Another layer of complexity arises when there is internal conflict over the proper resolution of a case. The conflict is frequently between the business and the compliance function, although conflicts can occur even within compliance. In many such instances, both sides can marshal strong arguments for their position. The organization should have a procedure describing how such disputes are resolved, including the conditions under which senior management must make a decision. Licenses A license is an authorization from the relevant authority to engage in a transaction that otherwise would be prohibited. The ability to obtain and manage licenses is accordingly an important aspect of sanctions compliance. Types of Licenses While details vary between countries, there are in general three types of “licenses.” An exemption states that the sanctions laws simply do not apply to certain conduct or types of transactions. No application or prior approval is required. A general license authorizes a particular type of transaction that would otherwise be prohibited without the need to apply for a license. A general license may or may not limit its availability to a certain class of persons. Some U.S. general licenses, for example, may apply only to U.S. persons. A person may simply engage in the conduct authorized without prior approval, and often (though not always) without the need to file any reports. Of course, transactions must fall within the scope of the general license. A specific license is a written authorization issued by the relevant authority to a particular person or entity, authorizing a particular transaction or series of transactions involving specified goods, services, or technology in response to a written license application. Persons engaging in transactions pursuant to a specific licenses must make sure that all conditions of the license are strictly observed. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 214 License Applications Who can apply for and grant a license, and the form of application, also vary between countries, and sometimes even between different licensing authorities within a country. Most license applications do not have to be submitted on a particular form. However, it is essential to include in the request all necessary information as required in the application guidelines or the regulations pertaining to the particular sanctions program. When applying for a license, it is always necessary to provide a detailed description of the proposed transaction, including: The identity of the party or country subject to sanctions that is the subject of the application The name and address of the applicant (whether the buyer, seller, or financial institution) The names of any entities that might perform services for or act on behalf of the applicant, including corporate affiliates, suppliers, and subcontractors A detailed description of the goods, services, or technology subject to the application Whether the license is sought for a single transaction, for multiple transactions, or for unlimited transactions over a given period of time The beginning and end date of the license License Applications in the United States In the United States, OFAC usually issues licenses to engage in transactions with parties subject to sanctions, although in some cases BIS or the State Department might be responsible instead. OFAC requires that applications be filed through its www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 215 electronic system, which is available at https://licensing.ofac.treas.gov/Apply/ Introduction.aspx. OFAC issues four general categories of licenses: Cuba travel Exports of agricultural and medical products to Iran or Sudan under the Trade Sanctions Reform and Export Enhancement Act of 2000 (TSRA) Release of blocked funds Specific license or interpretive guidance (“Transactional”) Depending upon the transaction, there may be specific guidance available on OFAC's website under relevant "Guidance on Licensing policy" on OFAC's various sanctions program web pages. A license from OFAC may be necessary if there is any U.S. nexus with the proposed transaction. This includes Participation by U.S. persons, including citizens, companies, and financial institutions, in any role Participation of foreign entities owned or controlled by U.S. persons in transactions involving Cuba or Iran U.S. origin goods, technology, or services Use of U.S. dollars Use of information technology or other systems in the United States to process the transaction, even if no U.S. person is directly involved in the transaction No license from OFAC is necessary if The activity is not subject to sanctions at all, such as travel by U.S. persons to Iran The activity is subject to an exemption, such as the import or export of informational materials, mail, or telecommunications A general license applies A license is necessary, but the relevant licensing authority is BIS or DDTC rather than OFAC In some cases, a license from both OFAC and either BIS or DDTC may be necessary: Transactions involving Crimea Exports to SDNs in Cuba, North Korea, or Syria Applicants may increase their chances of receiving a favorable determination by Providing a full explanation of the transaction, including the goods, services, or technology involved and a discussion of why granting the license is consistent with the goals of the relevant sanctions program www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 216 Calling the OFAC Licensing Hotline in advance to obtain guidance Reaching out to the licensing officer, once one is assigned, and encouraging them to ask if they need additional information Requesting expedited treatment only if truly necessary Many of OFAC's licensing determinations are guided by U.S. foreign policy and national security concerns. Numerous issues often must be coordinated with the U.S. Department of State and other government agencies, such as the U.S. Department of Commerce. Please note that the need to comply with other provisions of 31 C.F.R. chapter V, and with other applicable provisions of law, including any aviation, financial, or trade requirements of agencies other than the Department of Treasury’s Office of Foreign Assets Control. Such requirements include the Export Administration Regulations, 15 C.F.R. Parts 730 et seq., administered by the Department of Commerce, and the International Traffic in Arms Regulations, 22 C.F.R. Parts 120-130, administered by the Department of State. OFAC often takes months to respond to even fairly routine license requests. Even a request for a TSRA license may take 30 days or more. Response times for most transactional applications range from 9 to 18 months. In some cases, OFAC simply never responds, effectively denying the application without taking formal action. A denial by OFAC of a license application constitutes final agency action. The regulations do not provide for a formal process of appeal. However, OFAC will reconsider its determinations for good cause, for example, where the applicant can demonstrate changed circumstances or submit additional relevant information not previously made available to OFAC. ACSS has provided detailed information on OFAC licensing in a webinar that is available at https://sanctionsalert.com/20170629past/. Managing Licenses It does an organization no good to have a license if the relevant personnel are not aware of it. If an organization does have licenses, it needs a system for personnel to identify and refer to the system. This could be something as simple as a spreadsheet showing the available specific licenses, with succinct descriptions of what they authorize. The system could also include relevant general licenses and exemptions. Of course, the personnel should do more than just look at the description. Before proceeding with any transaction authorized by a license, a procedure should require the relevant personnel to review the license and ensure that it in fact authorizes the transaction. The procedure should include specific criteria to be reviewed, including the parties; the goods, services or technology involved; and the period for which the license is valid. The system should require documentation www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 217 that the license was reviewed, and a short explanation of the grounds on which it was concluded that the license was applicable. Other times an organization, especially a financial institution, may encounter a transaction requiring a license, where the license has been issued to another party. In the first place, the organization must have a policy as to whether it will engage in such transactions at all. It must also have a procedure detailing the requirements for reviewing the license and confirming that it authorizes, not just the party submitting the transaction, but the organization itself to proceed. If the organization is a bank, for example, and the transaction is submitted under a license to a customer, the bank must confirm that the license authorizes it as well as the customer to handle the transaction. Blocking or Freezing Sanctions laws of many jurisdictions, including the United States and the European Union, require that funds, assets, and other property be frozen (or, using the U.S. terminology, blocked). Frozen property cannot be transferred or disposed of without permission from the relevant government authority. In most cases, the party freezing the funds or other assets is required to report their action to the relevant authority. In the United States, for example, a U.S. person blocking property must file a report with OFAC within 10 days. Freezing is not the same thing as forfeiture. Title to the blocked property remains with the target. However, the exercise of powers and privileges normally associated with ownership is prohibited without authorization by the relevant authority. Blocking immediately imposes an across-the-board prohibition against transfers or dealings of any kind with regard to the property. The first step in freezing is to determine that property must be frozen. A comprehensive screening system that identifies the sanctions applicable to a transaction or person, including a requirement to freeze assets, can help accomplish this. Further, the system must provide a procedure for “how” to freeze. Typically, frozen funds or other property are placed in a designated and segregated account. Generally, funds must be placed in an interest-bearing account. Interest must be paid at a commercially reasonable rate. Some banks have opted to open separate accounts for each blocked transaction, while others have opted for omnibus accounts titled, for example, "Blocked Libyan Funds." Either method is satisfactory, so long as there is an audit trail which will allow specific funds to be unblocked with interest at any point in the future. An institution may notify its customer that it has blocked funds in accordance with OFAC's instructions. The customer has the right to apply for the unblocking and release of the funds. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 218 OFAC Report of Blocked Transactions The FFIEC BSA/AML Examinational Manual provides specific guidance in relation to blocked transactions. It states that U.S. law requires that assets and accounts of an OFAC-specified country, entity, or individual be blocked when such property is located in the United States, is held by U.S. individuals or entities, or comes into the possession or control of U.S. individuals or entities. For example, if a funds transfer comes from offshore and is being routed through a U.S. bank to an offshore bank, and there is an OFAC-designated party to the transaction, it must be blocked. The definition of assets and property is broad and is specifically defined within each sanction program. Assets and property includes anything of direct, indirect, present, future, or contingent value (including all types of bank transactions). Banks must block transactions that: Are by or on behalf of a blocked individual or entity; Are to or go through a blocked entity; or Are in connection with a transaction in which a blocked individual or entity has an interest. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 219 For example, if a U.S. bank receives instructions to make a funds transfer payment that falls into one of these categories, it must execute the payment order and place the funds into a blocked account. 153 A payment order cannot be canceled or amended after it is received by a U.S. bank in the absence of an authorization from OFAC. Rejecting Transactions Under some sanctions programs, especially in the United States, certain transactions are prohibited, but there is no requirement (or authorization) to freeze the funds involved. In such cases, a party must reject the transaction instead. It is vital that a party reviewing transactions correctly determine whether freezing or rejecting is required. In the United States, rejected transactions must be reported to OFAC within 10 days as well. OFAC Report of Rejected Transactions www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 220 Record Keeping and Reporting Record keeping and reporting are two important operational aspects of sanctions compliance. Record keeping requirements vary between countries. In the United States, OFAC requires that U.S. persons maintain records of transactions potentially subject to sanctions for at least five years: Except as otherwise provided, every person engaging in any transaction subject to the provisions of this chapter shall keep a full and accurate record of each such transaction engaged in, regardless of whether such transaction is effected pursuant to license or otherwise, and such record shall be available for examination for at least 5 years after the date of such transaction. Except as otherwise provided, every person holding property blocked pursuant to the provisions of this chapter or funds transfers retained pursuant to §596.504(b) of this chapter shall keep a full and accurate record of such property, and such record shall be available for examination for the period of time that such property is blocked and for at least 5 years after the date such property is unblocked. The requirements to report to OFAC the freezing of property or rejection of transactions were discussed above. In addition, parties must file – by September 30 each year - an annual report regarding any property they have blocked. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 221 OFAC Annual Report of Blocked Property The initial report must contain the following information: 1. The name and address of the person holding the property blocked; 2. A description of any transaction associated with the blocking 3. The associated sanctions target(s) whose property is blocked (such as a Specially Designated National or other blocked person), the location(s) of the target(s) (if known), and, if not evident, a narrative description of the interest(s) of the target(s) in the property; www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 222 4. A description of the property that is the subject of the blocking and its location in the United States including any relevant account numbers and account types, check numbers, reference numbers, dates, or other information necessary to identify the property; 5. The date the property was blocked; 6. The actual or estimated value of the property in U.S. Dollars;. 7. The legal authority or authorities under which the property is blocked and any action taken with respect to the property; and 8. A copy of any payment or transfer instructions, check, letter of credit, accompanying bill of lading, invoice, or any other relevant documentation received in connection with any related transaction. Reports on rejected transactions must include equivalent information. Contractual Clauses and Warranties While parties can conduct due diligence, they cannot foresee every eventuality with respect to sanctions compliance. One important method parties can utilize to reduce (though not eliminate) their sanctions risks is to use language in contracts to address sanctions issues. This typically takes the form of representations and warranties in contracts, such as loan agreements. Such representations and warranties typically include statements that: The party is not subject to sanctions by the UN, the EU, the United States, or other jurisdiction No person or entity owning more than a specified percentage of the company (usually either 10 percent or 25 percent) is subject to such sanctions The party is not currently under investigation by any authority for violations of sanctions laws In loan agreements, the party will not use the proceeds of the loan for investment in or transactions with parties or countries subject to sanctions by the UN, the EU, or the United States The party represents that performance of the contract on its part will not result in any violation of the enumerated sanctions laws There is no standard form of such clauses, representations, or warranties. The following are examples of sanctions clauses that address these issues in a U.S. context, but which could easily be adapted to address sanctions regimes of other countries as well: The Company is not nor, to the knowledge of the Company, is any director, officer, agent, employee or affiliate of the Company currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury Department (“OFAC”); and the Company will not directly or indirectly use the proceeds of the offering, or lend, contribute or otherwise make www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 223 available such proceeds to any subsidiary, joint venture partner or other person or entity, for the purpose of financing the activities of any person currently subject to any U.S. sanctions administered by OFAC. Neither the Company nor, to the Company’s knowledge, any director, officer, agent, employee or affiliate of the Company, is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury Department. The Borrower will not, directly or indirectly, use the proceeds of the Loan or lend, contribute, or otherwise make available such proceeds to any Subsidiary, other Affiliate of the Borrower, joint venture partner, or other Person to fund or facilitate any activities of or business or transaction with any Embargoed Person or any activities or business in any Sanctioned Country, or in any other manner that would result in a violation of any sanctions administered or enforced by OFAC, the U.S. Department of State, the United Nations Security Council, the European Union (EU), Her Majesty’s Treasury, any EU member state, or other relevant sanctions authority (collectively, “Sanctions”) by any Person (including, without limitation, any Person participating in the Loans, whether as underwriter, advisor, investor, or otherwise). For trade finance transactions, the International Chamber of Commerce suggests standard language: Presentation of document(s) that are not in compliance with the applicable antiboycott, anti-money laundering, anti-terrorism, anti-drug trafficking and economic sanctions laws and regulations is not acceptable. Applicable laws vary depending on the transaction and may include United Nations, United States and/or local laws. The ICC warns, however, against language that goes beyond compliance with laws to require compliance with company policies as well. Interaction with Other Compliance Areas Sanctions compliance is of course only one area within the general field of compliance. Sanctions compliance is closely associated with other areas of compliance, especially export controls and anti-money laundering. The following is a brief discussion of how these separate but related areas may interact. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 224 Export Controls Export controls and sanctions frequently intersect. Indeed, in some cases sanctions are administered under the export control laws. In the United States, for example, OFAC administers the sanctions regarding the export of services to Syria, while BIS is responsible for the regulation of exports of goods to Syria. In addition, export controls frequently apply to many of the same categories of goods as sanctions, especially arms. Organizations that import or export goods, services, or technology should have a separate system for complying with export control laws. In many situations, the sanctions and export control systems can share resources and expertise. Anti-Money Laundering Anti-money laundering (AML) also shares many similarities to sanctions compliance. The purpose of anti-money laundering controls is to prevent criminals from moving money from their criminal activities into the legitimate economy. Criminals use many of the same techniques to accomplish this that sanctions evaders employ, including shell companies, layering, and the use of cash. Detecting and preventing money laundering also uses the same techniques as sanctions compliance. Chief among these are customer due diligence and transaction screening. The goal of customer due diligence is to identify the ultimate beneficial owners of assets to confirm that they are not criminals. Transaction screening in AML looks for patterns of suspicious transactions that indicate something other than legitimate business purposes. AML screening may also be useful in detecting sanctions evasion, precisely because the same techniques are used to “clean” dirty money and to evade sanctions. For this reason, it is important that the AML and sanctions compliance functions of banks in particular share information on an ongoing basis, as suspicious behavior detected by one function could be directly relevant to the other. The following article from ACSS newsletter SanctionsAlert explains why compliance suits should treat sanctions as distinct from AML. Seven Reasons Why Compliance Suites Should Treat Sanctions As Distinct from AML July 7, 2018 By: SanctionsAlert.com In recent times, the implementation of economic sanctions has been the go- to method for governments to put pressure on those countries that do not adhere to international standards. The implementation of economic sanctions as a leveraging tool has grown exponentially in the last decade and, as a result, given rise to a myriad of new rules and regulations that compliance suites must follow or suffer the consequences. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 225 Nevertheless, despite this influx of new sanctions-based requirements, many compliance suites still continue to embed sanctions into their overall Anti-Money Laundering (AML)programs. While it is true that sanctions and AML regimes have similar objectives and characteristics, such as the use of judgment; the importance of CDD/KYC; and the adoption of a risk-based approach, there are a number of significant differences between sanctions and AML that warrant treating them as distinct compliance genres. 1. Different Legal Basis Reason #1 Sanctions AML Legal Basis More numerous legal In the U.S., the main instruments, and regulatory country specific requirements are in the regimes Bank Secrecy Act Sanctions and AML regulations are based on differing legal bases. In the U.S., AML regulatory requirements mostly derive from the Bank Secrecy Act (BSA) (1970), and its provisions. Additional legal requirements derive from, among others, the Money Laundering Control Act (1986), Annunzio-Wylie Anti-Money Laundering Act (1992), and the Money Laundering Suppression Act (1004). The Bank Secrecy Act and its regulations are not “country-based”. As such, the suspicious activity reporting regime and AML program measures that a financial institution in the U.S. must taketo prevent and detect money laundering byan Italian organized crime group would be the same as those taken to prevent and detect money laundering by a Russian organized crime group. This is different for sanctions. Because each program is based on different foreign policy and national security goals, prohibitions may vary between programs. The core statutory basis for most of OFAC’s country-based sanctions regimes is the International Emergency Economic Powers Act (IEEPA). This federal law, included in Title 50 (War and National Defense), Chapter 35, of the U.S. Code, provides continuing authority for the President—after a declaration of national emergency with respect to a particular threat—to regulate, in order to deal with that threat, among other things, transactions involving the property of foreign persons that is subject to U.S. jurisdiction. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 226 Another important piece of legislation is the Trading With the Enemy Act, which was amended in 1941, grants to the president, during times of war or national emergency, the authority to prohibit or regulate trade, investments, remittances, travel, and virtually any economic transactions with any designated country or its nationals, wherever located. The President exercises this authority simply by officially declaring what they believe to be a ‘national emergency’ and exercises this power by: 1. issuing executive orders (EOs), which declare or reaffirm a previous declaration of national emergency, and which may block the property of certain entities, prohibit certain transactions; 2. order the heads of departments, in particular the Secretary of the Treasury, to issue regulations restricting certain activities. The majority of country-based sanctions programs are regulations promulgated by the Secretary of the Treasury, pursuant to those executive orders, which enumerate prohibitions related to the country in question. Examples of regulations issued under IEEPA: 31 CFR Part 510 – NORTH KOREA SANCTIONS REGULATIONS 31 CFR Part 535 – IRANIAN ASSETS CONTROL REGULATIONS 31 CFR Part 537 – BURMESE SANCTIONS REGULATIONS 31 CFR Part 538 – SUDANESE SANCTIONS REGULATIONS 31 CFR Part 541 – ZIMBABWE SANCTIONS REGULATIONS 31 CFR Part 542 – SYRIAN SANCTIONS REGULATIONS 31 CFR Part 543 – CÔTE D’IVOIRE SANCTIONS REGULATIONS 31 CFR Part 546 – DARFUR SANCTIONS REGULATIONS 31 CFR Part 547 – DEMOCRATIC REPUBLIC OF THE CONGO SANCTIONS REGULATIONS 31 CFR Part 548 – BELARUS SANCTIONS REGULATIONS 31 CFR Part 549 – LEBANON SANCTIONS REGULATIONS 31 CFR Part 551 – SOMALIA SANCTIONS REGULATIONS www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 227 31 CFR Part 560 – IRANIAN TRANSACTIONS AND SANCTIONS REGULATIONS 31 CFR Part 561 – IRANIAN FINANCIAL SANCTIONS REGULATIONS 31 CFR Part 562 – IRANIAN HUMAN RIGHTS ABUSES SANCTIONS REGULATIONS 31 CFR Part 570 – LIBYAN SANCTIONS REGULATIONS 31 CFR Part 576 – IRAQ STABILIZATION AND INSURGENCY SANCTIONS REGULATIONS 31 CFR Part 588 – WESTERN BALKANS STABILIZATION REGULATIONS In contrast to AML, sanctions laws and regulations are different depending on the country, or group, that is targeted. Compliance suites will have to know these differences and make their decisions accordingly. 2. Fast-Changing Rules Reason #2 Sanctions AML Fast-Changing Can be enacted by Laws enacted by Rules Congress, but often is Congress, regulations quickly imposed by by FinCEN, only from Presidential Executive time to time Order In general, AML laws are less dynamic than sanctions laws. Relatively speaking, AML requirements are only changed in a material way from time to time. One example is the USA PATRIOT Act of 2001, which changed the BSA in more than 50 instances and triggered many new BSA regulations. More recently, in 2016, FinCEN issued strengthened Customer Due Diligence (CDD) requirements for financial institutions. This regulation, however, became effective almost two years later, in May 2018, giving financial institutions ample time to prepare for the new requirements. As Sanctions are usually enacted in response to a crisis or human rights violation, they are created in a much more volatile environment than their AML counterparts. Due to the frequent use of Executive Orders, which trigger new regulations issued by OFAC or other agencies, sanctions law and regulations often change much more quickly than AML law and regulations, giving rise to more complex compliance challenges, and less time for compliance departments to get prepare. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 228 OFAC changes to sanctions regulations in June 2018 06/28/2018: Removal of the Sudan Regulations 06/28/2018: Publication of Global Magnitsky Regulations 06/27/2018: Revocation of JCPOA-Related General Licenses, Amendment of the Iranian Transactions and Sanctions Regulations 06/18/2018: Publication of Amended Rough Diamonds Control Regulations 06/04/2018: Issuance of Ukraine/Russia-related License For example, last month alone, OFAC published the following changes in regulations on its website. These become effective after the date of publication in the Federal Register, which is typically in less than 30 days. As such, sanctions requirements not only differ from AML requirements, but also require a compliance team to keep abreast of continual change in order to avoid getting into trouble with the regulator. 3. A Broader Scope Not only are the legal instruments more numerous when it comes to sanctions, but their scope is more far reaching. As is strictly defined by regulations, AML typically applies to “covered” entities, which includes financial institutions and other sectors particularly vulnerable to money laundering such as casinos and precious metal dealers. If the industry is not listed, the regulatory rules do not apply. Reason #3 Sanctions AML Scope Applies to all Typically applies to individuals and “covered” entities companies from all defined by AML sectors regulations. With sanctions, all U.S. persons must comply with the laws and regulations. This includes all U.S. citizens and permanent resident aliens regardless of where they are located, all persons and entities within the U.S., all U.S. incorporated entities and their foreign branches. In the cases of certain www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 229 OFAC programs, foreign subsidiaries owned or controlled by U.S. companies also must comply. Certain programs also require foreign persons in possession of U.S.-origin goods to comply. This broad scope can create serious compliance challenges when dealing with sanctions, not only for limited industries, but individuals and all kinds of companies. 4. Fuzzy Guidance vs Prescriptive Rules Sanctions guidance is also much harder to come by than advice on how to comply with BSA/AML rules. For the most part, AML rules are prescriptive in nature. Often times, they will delineate exactly what is should be included in an AML program, going so far as to list the specific elements required, such as: Customer Identification Program (CIP), Customer Due Diligence (CDD), a designated AML officer, ongoing AML training, and periodic independent reviews. Reason #4 Sanctions AML Guidance/Rules Usually do not describe Prescriptive – require the process required to an AML program with achieve compliance specific elements. (exception: NYDFS Part 504) Sanctions compliance can be more challenging. With few exceptions, such as New York Department of Financial Services (NYDFS)’s Part 504 Rule, sanctions do not typically describe the process required to achieve compliance. When it comes to sanctions, compliance teams must seek out alternative ways to make sure that their company is fully compliant. 5. Not the Same Focus and Targets In addition to a broader scope, sanctions also focus on different behaviors and target alternate interests. Typically, sanctions will focus on who (or where) you are whereas AML will focus on what you are doing. In other words, AML laws will target the proceeds of crime, while sanctions will target the property interests of sanctioned parties (i.e. through blocking of property/freezing of assets/prohibition of dealing with or provision of financial services to sanctions targets). www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 230 Example: Julio Suarez who lives in Venezuela owns a laundry front business that he uses to launder money, which he makes from his drug farm. Reason #5 Sanctions AML Focus & Targets Focuses on who (or Focuses on what you where) you are and will are doing and the target property proceeds of crime from interests of sanctioned illicit activity parties AML rules would focus on the money laundered through Julio’s laundry business, and if Julio were your client and your company suspected unusual activity, you would have to file a Suspicious Transaction or Suspicious Activity Report (STR or SAR) with the relevant regulator. Sanctions rules would target Julio himself, and/or his country, and potentially freeze his assets. For example, he personally may be included on OFAC’s Specially Designated Nationals (SDN) List or fall under Venezuela’s sanctions regime that targets certain industries. Your company would have to be aware of the specific sanctions regimes that would apply to Julio and then cease business with him. hough this can seem simple enough, fulfilling sanctions requirements can become complicated seeing as Julio Suarez may be a common name. Your business could have many customers with the name Julio Suarez and you may not be sure if your business’ client is the same Julio Suarez who has been designated, or perhaps your team is uncertain whether or not Julio falls under Venezuela’s targeted sanctions regime. 6. Real-Time vs. Post Facto Screening In addition to different targets, sanctions and AML emphasize varying types of transaction monitoring. Reason #6 Sanctions AML Screening/ Emphasize real-time Generally post-facto Monitoring screening monitoring of transactions With the exception of client-onboarding and KYC, AML compliance generally consists of post-facto monitoring of suspicious transactions based on defined scenarios and complex behavioral typologies. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 231 FinCEN, uses a threshold of $5,000 (or $2,000 for MSBs) for reporting suspicious transaction that could involve potential money laundering or terrorist financing. On the flip-side, sanctions monitoring emphasizes real-time screening of transactions to make sure a client is not violating a sanctions regime or that a client has not been placed on a watch list, such as OFAC’s SDN List. Sanctions lists with designated persons and entities are constantly changing. Further, there is no minimum dollar threshold – any transaction is a violation. This makes the operationalization of real-time compliance a less than straight forward task. 7. Harsher Liability Lastly, but certainly not least, sanctions have harsher compliance standards than AML. AML requirements incorporate risk-based compliance measures for violations and U.S. criminal laws typically require a wrongful (or wilful) state of mind as an element of any violation. Reason #7 Sanctions AML Harsher Principle of strict Typically based on Liability liability willfulness In contrast, OFAC sanctions rules employ a principle of strict liability. This means that a individual or company will be held accountable for violating sanctions even if there was no wrongful state of mind. OFAC emphasizes that individuals and entities will be held accountable regardless of the dollar value of the transaction at issue. In other words, in our scenario above, if a financial institution processes a bank transfer for Julio Suarez involving drug proceeds, and there were no red flags of money laundering or no indicators of an unusual transaction, the government is likely to take this into account. However, if Julio was designated as an SDN, and the financial institution processed a transaction for him, without knowing he was designated, the financial institution can face OFAC penalties even if it didn’t “know” about the violation. The Business Environment and Sanctions A final operational issue in sanctions compliance is the interaction between “the business” and the sanctions compliance function. Simply put, the business of the business is to make money. This is done by gaining customers and making sales. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 232 Sanctions compliance, on the other hand, often requires an organization to forego business, however profitable it might be. It is inevitable in such circumstances that there will be conflicts. The conflict may not be clear-cut. Personnel on the business side are commonly under enormous pressure to generate profits. In such circumstances, it is easy to take an aggressive approach towards sanctions while reassuring oneself that one is complying with the law. On the other side, sanctions compliance personnel may be told that all they ever do is to say “no,” without necessarily understanding the complexities of or the pressures on the business side. Finally, there are cases, where even senior management simply decides that making money is more important than following the law. Resolving these conflicts requires that both the business and compliance understand each other. It is vital that the sanctions compliance function understand the details of the organization’s business, as well as the incentives the business side faces. It is equally vital that the business understand at least the broad outlines of the applicable sanctions laws, as well as the organization’s sanctions policies and procedures. The ultimate goal is for the business side of the organization and the sanctions compliance function to work together in a manner that maximizes profits while minimizing exposure to sanctions risks. Summary The sanctions compliance function needs clear procedures for resolving both standard and complex cases. Resolving complex cases may require going outside the compliance function for information and expertise. The effective use of licenses is a key part of any sanctions compliance system. This requires a system that identifies when licenses are necessary; prescribes the procedure for obtaining licenses; and ensures that the knowledge of available licenses is available throughout the organization. Organizations should have procedures for reviewing transactions to ensure that they are in fact covered by a license when necessary. An effective sanctions compliance system requires procedures detailing when and how to freeze or reject funds or assets. Record keeping and reporting are essential duties of any sanctions compliance system. Sanctions clauses, warranties, and representations can provide additional mitigation against sanctions risks. The sanctions compliance function must work closely with export controls and AML. The business and the compliance function must understand and communicate with each other. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 233 Review Questions 1. What are the differences between general and specific licenses? 2. What should a license application include? 3. What are OFAC’s requirements for reporting and record keeping? 4. Give three examples of sanctions clauses in contracts. 5. What are the similarities between AML and sanctions compliance? www.sanctionsassociation.org