Financial sanctions – are you compliant?

To provide some examples, the FSA report talks of serious confusion between AML due diligence and name-checking for sanctions purposes; of a lack of appreciation of the full extent of financial products and services implicated; and of firms that have policies but fail to make sure staff are aware of them or to provide training.

The inadequacies seem to exist – no surprise, really – in inverse proportion to the size of the firm, with smaller firms lacking the resources to understand and deal with the significant complexities of the sanctions regime.

Philip Robinson, director of FSA’s financial crime and intelligence unit, has acknowledged that this is now a focus area for FSA as (whilst Her Majesty’s Treasury is the responsible listing and enforcement agency) FSA-authorised firms are obliged to have adequate systems and controls to meet FSA’s statutory objective of the reduction of financial crime – particularly with recent changes to the sanctions regime and much closer government scrutiny.

The UK issues are also thrown into sharp relief by the severity of the US regulatory and enforcement agencies in relation to breaches of US sanctions – with notable events including ABN AMRO’s $80mn fine in December 2005, and LloydsTSB’s $350mn fine in January this year – the latter example being an alarming demonstration of the extra-territorial reach of US law and regulation.

Interestingly, the purely political dimension of the HMT financial sanctions regime was most clearly demonstrated when it was used to freeze the UK assets of Landsbanki following the collapse of the Icelandic banking industry.

What is required?

Generally, for ‘entity’ lists, firms authorised under FSMA must have controls to ensure:

• that funds or economic resources are not made available to any individual or organisation on HMT’s consolidated list, directly or by facilitation;
• that funds or economic resources belonging to any such person are immediately frozen;
• in the case of individuals and entities on the Terrorism List, no other financial services are provided or made available;
• that information relating to any such person is promptly disclosed to HMT’s Asset Freezing Unit.

For ‘country’ sanctions, requirements can go beyond listed entities and require vigilance and reporting in respect of non-listed entities – for instance, the Iranian regime requires reporting to SOCA of any transaction with an Iranian credit or financial institution (including branches/subsidiaries) suspected of relating to nuclear proliferation.

Authorised firms must take a risk-based approach to identifying individuals, entities or transactions – including, where relevant, trade finance and insurance – make reports and freeze or deny funds and economic resources to sanctioned parties.

Four further points that authorised firms should bear in mind:

• No reliance should be placed without proper enquiry  on third parties (even other FSA authorised firms) to have conducted sanctions checks on introduced clients;
• There are individuals and entities on HMT’s lists that are resident in the UK;
• Names are continuously added to and deleted from the HMT lists;
• Where business is conducted across borders, or in other currencies, other jurisdictions’ sanctions regimes may apply as well – and there is limited consistency across those regimes.

Support to the industry

Accepting the significant complexity of the regulations – even those purely prevailing in the UK - what is not so surprising is FSA’s very direct indictment of the lack of expertise of the compliance consultancy industry:

• “We found that many small firms were very reliant on compliance consultants who often focused on AML requirements but did not cover financial sanctions requirements.”
• “We found some compliance consultants were providing small firms with inaccurate advice.”
• “Many small firms relied on compliance consultants to provide training, but this tended to be AML focused and generally did not include specific training on UK financial sanctions.”

 As a matter of public policy, both the government and the FSA have a new, clear focus on compliance with the sanctions regime, and Mr Robinson has said that it will be included in future FSA ARROW reviews.