Action against corporates by financial regulators demonstrating they are widening their focus and bringing corporates into the world of financial crime compliance is well documented.  Non-compliance can attract heavy fines and the risk of reputational damage which would be considered reckless, at best.

Regulations to combat financial crime include anti-money laundering (AML) laws, financial sanctions and monitoring of high-risk individuals. Sanctions are among the most challenging of the financial crime regulations for corporations. In addition to jurisdictional issues, operational decisions on matters such as sanctions list management, transaction currency, customer or employee nationality, local employment laws and transaction routing must be considered.

The multi-jurisdictional challenge

The majority of economic sanctions emanate from the US and Europe. The US Treasury Department’s Office of Foreign Assets Control (OFAC) has recently fined a number of firms – including those operating outside of the US – for sanctions violations. In fact, three of the four entities fined by OFAC for sanctions violations early this year, were corporations and compliance experts believe that the size and scale of fines for corporates is set to grow.

OFAC administers a number of different sanctions programs, covering countries such as Syria, Iran and Russia as well as ‘specially designated nationals’ (SDNs) who are defined in almost 60 different lists. The sanctions are either comprehensive or selective, using the blocking of assets and trade restrictions to meet the foreign policy and national security goals of the US.

Other countries, such as the UK and France, have similar bodies to monitor those suspected of financial crime.   

Corporates playing catchup

With regulators clearly signalling their intention to take a closer look at corporate compliance with international sanctions, making the assumption that a bank is responsible for protecting its corporate clients against potential violations will not be a mitigating factor when it comes to regulatory action.

As businesses expand across borders, the exposure to potential violations increases and can extend to off-shore affiliates.  Many corporates are playing catch up with their understanding of regulatory responsibilities and as their knowledge increases, so does their concern that their internal processes may need to be more robust.

It is true to say that financial crime compliance affects every industry, but some sectors will be more highly exposed to potential violations because of the countries in which they operate, others because of the individuals or institutions with whom they do business.

Airlines, logistics, oil exploration and pharmaceuticals have been relatively proactive in managing their risk, while those companies that operate predominantly in perceived ‘risky’ jurisdictions have likely been sensitised to the importance of compliance.

There are a number of ways in which corporates can address the issue of regulatory compliance:

#1 Screening financial transactions is a very effective way to mitigate the risk of sanctions violations. This has the added benefit that corporations not only assure themselves that the transaction is compliant, but they can avoid payment blockages where a query on a single transaction could hold up all the remaining payments in a batch. Corporate treasury departments can expedite payments and improve straight-through processing.

#2 Screening customers and suppliers during the on-boarding process is vital, ongoing screening is essential. Checks are made against lists issued by various bodies (including OFAC) to ensure that the countries, companies or individuals with whom they deal are not subject to sanctions.

#3 Sanctions list management is recognised as a challenging task. The lists change regularly, sometimes daily, with names of entities and individuals being added and subtracted. As such, customer and supplier databases would need to be screened regularly to maintain ongoing compliance.  Diligence is mandatory, as the job of managing sanctions lists and updating sanctions filters is both complex and time consuming.

#4 Beyond your borders.  Although it may be obvious it is worth considering the example that companies operating in the US must comply with US regulations in their everyday business activities, it may not have been as clear that this obligation also extends to organisations outside of the US that are buying US goods, trading in US dollars or have US staff on their payroll who are involved in payment processing.

The onus is on the corporate to be compliant and it must be a high priority to implement effective controls.

Creating a framework for the future

Fighting financial crime remains a high priority for regulators and governments across the world. Regulators and policy makers, although initially focused on the financial industry, are now widening their net to include the broader corporate community.

Corporates can learn from the financial industry and incorporate financial crime compliance into the day-to-day management of their business.

Regulatory compliance costs are going to increase as businesses expand into new countries and every effort has to be made to identify how regulations may affect their business.  Implementing practical steps to ensure their compliance is fit for purpose will not only protect reputation and avoid fines; it will ensure their business can prosper as it expands to new territories.