Following moves to limit access to the SWIFT network, economic sanctions on Russia continue to increase, covering banks, entities and individuals, ports, vessels and goods that can be classified as ‘dual use’.
What is unique about these sanctions is the speed at which they have been enacted, and the wide range of sanctioning entities involved. While it was widely expected that the US, UK and EU would act, South Korea, Singapore, Switzerland, Canada, Japan, Taiwan, Australia and New Zealand are all also incorporating some kind of sanctions against Russia.
The challenge now for financial institutions globally is to ensure that their sanctions and AML programmes are sufficiently robust to ensure effective compliance in this rapidly evolving landscape.
What should flag a concern?
Sanctions programmes are designed to cut off as many routes as possible for a person, institution, or country to access the international financial system. As these new sanctions start to cover more and more ground, for example the Russian Central Bank and SWIFT network, the avenues available to illicit actors to evade them becomes limited – and as a result, their evasion techniques will become ever more challenging to spot.
Financial institutions should therefore identify a series of red flags, any of which might signal an attempted circumvention. These should include:
- increased transactions in sectors that may allow continued access to international financial market, for example money transfer services providers and NGOs
- dealings, directly or through a client of a client, with high-risk countries for terrorism finance, with sanctioned countries or territories where sanctioned persons are known to operate
- tampered or modified documents with no apparent explanation, especially those related to international trade
- an increased use of intermediaries, especially in countries known to be an ally/or to have not implemented international sanctions
- fund flows that exceed normal business
- changes in activity or financing that do not relate to the original or intended purpose of the company
- a refusal to honour requests to provide additional KYC documentation or to provide clarity on the final beneficiary of the funds or goods
- the geographic location of a transaction; for example if a foreign affiliate, correspondent bank or the ultimate customer is located near a sanctioned country’s borders, or within a country that is considered an ally/has not implemented international sanctions
In addition, financial institutions should also pay particular attention to changes in behaviour in relation to virtual assets, including any
- increased use/transfer of funds to a virtual assets exchange’s operational banking account (to fund a virtual asset wallet)
- sending of funds to a few select wallets at unregulated virtual assets exchanges (or exchanges in territories considered high risk for sanctions evasion)
Screening lists
It is sometimes tempting to de-risk immediately, and in some cases that will be the most appropriate course of action. But at this stage the key is effective and accurate list management. It’s critical that firms understand the potential operational impact of maintaining potentially daily updates to numerous screening lists, whether that is to ensure the list provider is sending good quality data, ensuring lists are fit for purpose or taking a risk-based approach to list management to support effectiveness and efficiency of sanctions screening.
AML and Risk assessments
In the medium term, understanding the firm’s overall exposure to potential sanctions risk will be crucial, especially where firms have a multi-jurisdictional presence. Sanctions evasion relies on many traditional money laundering techniques, making it imperative to conduct an overall AML Risk Assessment with Russian sanctions as a trigger event. And that means looking at the key drivers of inherent risk through the lens of sanctions on Russia, then using that output to evaluate and act on the effectiveness of your controls and residual risk.
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