By Tony Horscroft – Group Head of Compliance, Ipes
Sanctions are a key consideration in financial services. They are used by governments to stop individuals or companies from benefiting financially when they have been identified as being linked to financing crime or terrorism. Lord Patten, former External Affairs Commissioner of the EU says he sees no let up in their frequent use. He commented, “They have become the only thing that a lot of governments feel is in their gift, beyond a strong communiqué, as a gesture of disapproval.”
Academics and policy makers may argue over the effectiveness of sanctions, but Neville Hall, Group Compliance Director for Travelex, a UK based global payments and Foreign Exchange Company says, “sanctions have always been there and always will be. The only question is how best to comply. Although sanctions can affect almost any industry, financial services is a particular focus for regulators.”
What are sanctions?
‘Country’ sanctions refer to the various country specific financial sanctions regimes that apply typically in a major G8 economy or under a UN or EU mandate. These sanctions target institutions or people trading from or “linked to” specific countries.
There are plenty of recent examples. In January the United States imposed new sanctions on North Korea in response to the cyber-attack against Sony Pictures’ film “The Interview”. Last year, in response to the Crimean crisis and subsequent annexation of Crimea by the Russian Federation, some governments, led by the United States and the European Union, imposed sanctions on Russian individuals and businesses.
‘Financial’ sanctions effect designated persons – individuals or entities. Those designated persons (‘sanctions targets’) are listed within Consolidated Lists published by inter‑governmental websites.
A designated person, sometimes referred to as a listed person or a sanctions target, is a person listed in a financial sanctions regime, typically in a UN Security Council Resolution or EU Regulations.
Designated persons are typically persons who have been identified as being connected with financial crimes, unrecognised political regimes or have known involvement with terrorist activity. Any associated assets of such designated persons, should be frozen and it is prohibited for financial services businesses to provide funds or financial services to them.
So how do I comply with sanctions?
Review sanctions lists to check if any investor in your Fund is involved in financing crime or terrorism, so that you can take the appropriate action.
There are a number of sanctions lists in operation globally.
- HM Treasury;
- European Commission;
- Commission de Surveillance du Secteur Financier;
- UN Treasury;
- US Treasury – The Office for Foreign Assets Control (OFAC);
- Guernsey Financial Services Commission;
- Jersey Financial Services Commission;
- Swiss State Secretariat for Economic Affairs;
- Australian Government – Department of Foreign Affairs and Trade.
Screening requirements in each jurisdiction are set out either in legislation or in each regulator’s guidance and best practice protocols.
Typically international sanctions lists are updated daily with individual names and the names of corporate entities being added and removed. It can be challenging to keep up to date with the changes applied to the various sanctions lists. Lists vary in format and language and often require different outcomes and treatments.
Q. How often do I need to undertake sanctions screening?
A. Whilst there is nothing within legislation that states how often sanctions screening should occur, your processes and regularity of screening will be scrutinised should you be investigated for failing to comply with the applicable legislation.
Best practice would suggest a daily sanctions screening process to be adopted. This avoids calls and distributions being delayed unnecessarily by having to undertake sanctions screening each time.
Q. What happens if I do not undertake sanctions
A. If you do not undertake sanctions screening, you will not be able to identify those involved in financing crime or terrorism. Failure to do so could result in regulatory sanction. This could be in the form of financial penalties or regulatory restrictions applied to your operating practices.
Q. What happens if one of my investors is found to be on a sanctions list?
A. If an investor name is matched with a name on a sanctions list, further checks will be needed to determine whether it is a true match or the same name but a different individual or entity. More information may be needed to assist in this process. If there is a true match then the relevant authorities must be notified.
Q. Can I outsource sanctions screening?
A. Yes. Sanctions screening can be outsourced and can be carried out on your behalf. Some Private Equity Managers do prefer to keep sanctions screening in house however as the sanctions lists are growing in number and complexity, the volume of screening activity increases and some Private Equity Managers may prefer to outsource screening.