Any business is now liable for sanctions violation penalties - not just financial institutions

Sanctions compliance used to be primarily a worry for financial institutions. However, Russia’s invasion of Ukraine has changed that.

Since the invasion that began on 24 February, Ondato has seen a massive and continuing increase in the number of businesses outside the financial services sector wanting to ensure they remain compliant in the face of a huge expansion in the number of sanctions-listed organisations and individuals. We have seen a doubling in the number of sanctions checks in the first quarter of 2022 compared with the same period last year. And that applies right across multiple sectors — not just banking — including import/export companies, logistics, manufacturing and even goods and commodities trading companies. 

Business is turning to automated compliance solutions like ours because of the rapid and continuing escalation in the number of sanctions targets. As more and more companies and individuals are added to sanctions lists, the riskier manual compliance becomes. The number of Russian entities coming under sanctions has nearly tripled, from 2,754 before 22 February to 8,068, with the official documentation accompanying the new lists expanding from 35MB to 70MB. New impositions are being introduced almost every day. 

The risks of getting it wrong

Getting it wrong, and trading with or assisting a sanctions-listed entity, carries severe penalties for business and individuals. That’s both in terms of fines and jail sentences. In the UK, where Ondato is based, it is a criminal offence to contravene or help someone to circumvent the sanctions, with a maximum sentence of seven years' imprisonment and a fine. In the Republic of Ireland the penalties are a maximum three years’ imprisonment and a €500,000 fine, with other EU countries imposing even more draconian jail terms. 

If jail terms and heavy fines are not enough of a deterrent, the business disruption caused by non-compliance can also be significant. Banks are required to cross check that payments are not being transferred to sanctioned companies or individuals but  if a company does not make similar checks,  its money might be frozen in the bank for a long period, with the likelihood of broken supply chains and badly strained business relationships. 

Once is not enough

With so much at stake, it is now crucial for businesses to check their business relationships and the partners they work with. They must ensure compliance with sanctions and terminate business relationships with sanctioned companies or individuals. 

However, once is not enough. Compliance is not a case of a one-time inspection of business relationships. The list of those caught within the sanctions net is growing daily, jurisdiction by jurisdiction, requiring constant monitoring, as the situation changes unpredictably. At the time of writing, for example, most governments opposed to Russia’s invasion have announced plans for an additional wave of sanctions targets, following new revelations of potential major war crimes.  

Avoiding sanctions penalties

Unsurprisingly, businesses are starting to pay much closer attention to screening and monitoring sanctions, as well as checking business registers and business relations. They want to be certain they are working with partners unrelated to sanctioned individuals and that the ultimate beneficiary of any business transaction is not involved with financing the war in Ukraine.

Checking sanctions and business relationships is a big headache for businesses, as most solutions are expensive or require significant human resources. And organisations that have taken the trouble to put KYC procedures in place typically focus these on the start of any new relationship. Many companies are less likely to maintain the same level of watchfulness as customer relationships develop over time. However, constant vigilance about customers’ changing status is essential, as the Ukraine situation demonstrates all too clearly. Without ongoing monitoring, financial institutions and other businesses affected by sanctions regulations  may be unknowingly committing criminal acts with draconian penalties attached.

Monitoring services, such as Ondato’s, prevent accidental non-compliance over the customer lifecycle by automatically cross-checking customer lists against new additions to sanctions lists or financial authorities’ registers of people who may require additional checks or exclusion from services. The best platforms provide enhanced process automation for greater efficiency and lower operating costs, which minimise the risk of interventions and fines from regulatory authorities. They can also be fully tailored to where businesses operate, with options to incorporate national and international registries and databases, languages and document types. This sort of granular control of data makes it easier for compliance officers to identify cases that fall into grey areas and other potential risks, enabling them to conduct further checks. 

The Ukraine crisis has lifted KYC right back up the business agenda. The tragedy reminds us that compliance is not just a tick-box exercise but can prevent real-world harms from happening or getting worse. It has also brought this message home to non-financial services sector companies who might have previously thought they were not required to take action.