Global Sanctions: Evaluating and managing the changing landscape

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Judith Norman
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1 Global Sanctions: Evaluating and managing the changing landscape February 2016

2 2 PwC Global Sanctions: Evaluating and managing the changing landscape 2015: A year of change After 55 years, 2015 saw the beginning of major changes for US sanctions against Cuba. Equally as historic is the Joint Comprehensive Plan of Action (JCPOA) which paves the way for the UN, EU, and US to ease sanctions against Iran. Significant movement on some of the longest standing sanctions regimes does not mean that the compliance challenges for businesses have decreased in any way. The unwinding of the Cuban and Iranian sanctions regimes will be a slow and likely painful process for businesses. The changing political landscape in Ukraine, Russia, Sudan and Syria, as well as increasing enforcement by authorities around the globe, also pose a number of challenges for businesses trying to deal with evolving financial sanctions. One of these challenges is the rapid pace of change both on the ground and in the nature and extent of the regulatory responses adopted both unilaterally and multilaterally, and the uncertainty which that creates. PwC provides its clients with the expertise of former government regulators and industry leaders with extensive experience in effectively addressing a variety of sanctions compliance needs. Our experienced professionals can assist companies in meeting the challenges associated with all aspects of sanctions compliance from assessing and managing compliance risk, to designing, enhancing and implementing compliance programmes, including integrating sanctions compliance into everything from business strategy to daily processes. Our team is also highly experienced in advising Financial Services firms on how to navigate the complexities of multijurisdictional sanctions regimes. Our experts have successfully assisted clients to: Manage the challenges of sanctions compliance with proactive reviews of policies, procedures and systems, Respond to suspected sanctions breaches, and programmatic weaknesses or gaps, Respond to requests from regulators, Conduct sanctions investigations and remediations on a large scale, Identify and respond to the practical and operational issues faced by the organisation, and Enhance the operational effectiveness of sanctions screening technology and processing, including improving efficiency and accuracy of alert management and fuzzy matching optimisation. Managing sanctions compliance in the financial services industry Changes in the regulatory landscape are causing many financial institutions to re-evaluate their approach to sanctions compliance We recognise that the sanctions landscape is evolving, challenging and complex. The Ukraine crisis of 2014, the changes to longstanding sanctions regimes (i.e., Cuba and Iran) and the increased activity by regulators around the globe, have resulted in an increased awareness of the potential impact of sanctions across all sectors. In the current sanctions environment, the Financial Services industry has felt a significant impact as it must balance regulatory obligations against efficient and cost effective customer service and transaction processing. We understand that as a senior stakeholder you must make difficult business decisions that may impact your ability to comply with sanctions obligations. These decisions may include: The extent of testing to perform on your sanctions screening system to ensure effectiveness and efficiency of your compliance environment, How to deal with potential and actual matches against sanctions targets, How much due diligence to do on each counterparty or transaction, How to identify and adequately mitigate risks to your organisation, What type of customers to avoid, and how to identify higher risk customers and politically exposed persons (PEPs), and Whether and how to exit from customer relationships or even from regions or lines of business. Additionally, Financial Services companies must demonstrate and promote throughout their global businesses a strong risk based compliance culture, which encourages appropriate behaviour by all staff. Failure to demonstrate adequate compliance may result in: Criminal and civil prosecutions, Significant fines, Regulatory censure, Imposed oversight of management from independent bodies, Required look back reviews and remediation of data over periods of up to ten years, and Reputational harm. As a result, the cost and impact on Financial Services companies that fail to take account of sanctions compliance obligations can be significant.

3 3 PwC Global Sanctions: Evaluating and managing the changing landscape the initial rush to reconnoitre Cuba and Iran will slowly but surely give way to a more measured approach It will be months, if not years, before the sanctions on both countries will be lifted. Even then foreign firms will face big obstacles to conducting business... The Economist, When the sanctions come off, July 25th 2015 Financial sanctions are mostly a problem for the banks, aren t they? Focusing on insurers and reinsurers compliance with U.S. economic sanctions The tools to guarantee sanctions compliance that policy makers adopted for economic sanctions originally derived from the need for non-proliferation sanctions in the area of anti-money laundering and prevention of financing for terrorist organisations. This led to a focus on the banking industry which forced the institutions to greatly enhance their control procedures and compliance regimes. As a result, now banks are far ahead of the overall Financial Services industry standard when it comes to sanctions compliance. However, recently we have seen OFAC shifting interest also to the insurance industry. From maritime to life insurers, US economic sanctions pose a significant risk to insurers and re-insurers, and even in cases where on the first glance no risks are visible, further analysis unveils a wide range of potential sanctions violations. To illustrate some of the difficult economic sanctions issues, here are a few example situations: A US firm obligated to pay out an insurance claim learns that the beneficiary of the policy is living in a sanctioned jurisdiction, e.g., Crimea, Syria or North Korea. A ship registered in a non-sanctioned country faces technical problems offshore forcing the ship to call a port in a sanctioned country. The necessary repair work executed by a local contractor, normally covered under an ocean maritime insurance, will now be subject to US sanctions. A US person travelling in a sanctioned country needs medical treatment in a hospital and asks the US-based insurer to reimburse costs for the treatment provided by doctors in the sanctioned country. An insurer that must pay claims discovers that the payee s bank account is co-owned by another person living in a sanctioned country. An insurer is considering dealing with a counterparty where individuals named on OFAC s Specially Designated Nationals List are involved as shareholders or in an operative position.

4 4 PwC Global Sanctions: Evaluating and managing the changing landscape We knew there was a risk, but we didn t expect it to be that big. Keefe Bruyette & Woods analyst Jean-Pierre Lambert; from article in WSJ Feb. 13, 2014 OFAC fines involving FS industry n Annual fines $1,200,000,000 $1,000,000,000 $800,000,000 $600,000,000 $400,000,000 $200,000,000 $ Source: OFAC s website on the Civil Penalties and Enforcement Information page, available at: Growing fines and settlements Global sanctions facts: In today s highly globalised world the risk of being investigated for violating US sanctions law is higher than ever. Furthermore, over the last several years, the cost of penalties imposed by and settlements with OFAC has been increasing steadily. This is likely related to the increase in statutory maximums for civil penalties, increased coordination between federal, state and local agencies, and the discovery of many long-term practices to conceal prohibited transactions. As seen in cases since 2012, base penalties are reaching billions, with more and more voices in Washington claiming that European banks fines were not high enough. The cases issued in 2014 and 2015 illustrate that fines continue to rise and that US enforcement agencies will continue to target European banks processing illegal transaction through US financial institutions. An important part of any sanctions investigation is the level of cooperation of the company being investigated, including how the apparent violations came to light. As seen with several financial institutions, voluntary and cooperative behaviour plays a major role in the settlement resolution and subsequent fine. Also of note are improvements in investigative analytics. In the early 2000 s these techniques were still in their infancy, but with modern investigative techniques information can be analysed faster. For example, the technology used in today s investigations can handle billions of fuzzy logic combinations to facilitate look back reviews and help paint a better picture for regulators. In fact, it may not be a coincidence that as technology has developed there has also been an increase in the depth and scope of investigations, particularly involving cross border transactions. A financial institution s ability to quickly analyse its data will have a major impact on the outlook of an investigation. Combining expertise in investigations with proven technology will help facilitate this process. 40,000 Names and aliases in lists 1 day Average interval of list updates 20% Increase in names and aliases in less than a year 3,000 New aliases in a single EU update on 19 July billion + Possible fuzzy logic combinations $14.8 billion Total fines levied for sanctions violations since 2004

5 5 PwC Global Sanctions: Evaluating and managing the changing landscape Multinational companies face a complex array of EU and US sanctions and trade compliance regulations as well as evolving local watch-lists. Despite general similarities in the EU and US approach to Financial Sanctions nowadays, over time we are witnessing differing requirements imposed on companies in each jurisdiction. However, companies, wherever located, must consider potential obligations to comply with US sanctions and watch-lists as US sanctions law allows for enforcement whenever a US person is involved. OFAC sanctions may apply where transactions are denominated in US dollars or where companies are listed in the US and US persons are involved in the trades or deals. In the EU, compliance infractions with regard to the financial sanctions are not as rigidly enforced as in the US. With no central European authority administering the sanction regime enforcement, this task is still left to the national regulators and authorities of the member states. Moreover, most of the settlements with European banks published by OFAC during the past years comprise fines for alleged Cuba-related deals, even though the EU has a blocking statute against the US Cuba sanctions in place. The inconsistency between EU and US sanctions may become even more apparent in the coming years as a result of the Iran Nuclear Deal. Under the JCPOA, EU companies will be allowed to provide various services, including banking and insurance activities, involving Iran, whereas US companies will not. As outlined previously, these differences between US and EU sanctions positions, and considering the increase in enforcement actions, companies will need to proceed with caution, particularly those operating in both the US and EU. How we can help PwC s multi-disciplinary team has developed an approach to help you assess your risks, plan your response and identify opportunities for efficiency regarding sanctions compliance. PwC offers a proven methodology coupled with the ability to efficiently capture and analyse global data in multiple languages by our Data Analytics team. Subject Matter Experts with industryspecific insight will leverage their deep understanding of EU, UN and US regulations and international processes around trade and economic sanctions. Our team also consists of high caliber individuals with a proven track record in Corporate Intelligence and Compliance Investigations to support an in-depth review of potential breaches of sanctions or internal policy. Understanding your current and potential exposure to financial sanctions Regulatory litigation readiness or how to prepare your organisation for the worst case scenario While some of the issues posed by the increasing risk of being subject to a US regulatory investigation present immediate or self-evident business impact, others will emerge over time. With every settlement, the US authorities gain deeper insight into the business processes of financial institutions around the globe. At the same time, the request for higher fines for Non-US financial institutions and insurers by the US increases. Proactive risk assessments and whatif analyses can help prepare your organisation in dealing with these developments. In order to increase your regulatory litigation readiness you can make sure you verify that: Your sanctions compliance processes are up to date, You sample tested your transaction data from the past, You verified that all of your transaction and user data within the organisation is archived properly, You have evidence of due diligence performed to identify sanctioned parties, and You assured that all necessary evidence can be pulled out of your IT systems with minimal costs and delay.

6 6 PwC Global Sanctions: Evaluating and managing the changing landscape How we can work with you Assessment of sanctions risks Review operations to assess sanctions risks and exposure to inform the creation of appropriate risk-mitigating controls. Strategy and operational design Perform current state assessment to identify strengths and areas for improvement in your sanctions programme and benchmark against peer institutions. Develop a strategic vision and roadmap to implementation of your target state. Policies and procedures Design and help implement policies and procedures to manage the complexity of sanctions compliance, whilst minimising business impacts. Systems selection and implementation support Assess and select vendors that will empower your institution to execute the strategic vision for your sanctions programme. Perform data lineage and quality assessments as well as tuning exercises to optimise the performance of your sanctions tools. Data integrity and cleansing Help establish source to screening data lineage methodology to assure data is current, accurate and held in retrievable and usable form. Reduction of false positives Either manually or using our bespoke industry leading tools, implement rules to close alerts and clear false positives. Incident response In the event of a breach, design and implement any response, whether strategic, tactical or remedial, including developing approach, tools and training. Regulatory responses Coordinate data extraction, remediation and response to meet demanding regulatory deadlines. Remediation/look back exercises Meet the demands of reviewing or remediating past activity to identify potential system or process failures and confirm integrity and effectiveness. System mapping and testing Review system architecture to ensure operational effectiveness and identify areas for improvements and enhancements.

7 7 PwC Global Sanctions: Evaluating and managing the changing landscape Additional information David W. Grace Global Financial Crime Leader PwC UK +44 (0) Daniel L. Tannebaum Global Financial Services Sanctions Leader PwC US Sebastian Ahrens PwC Singapore sebastian.ahrens@sg.pwc.com Pandu Aryanto PwC Indonesia pandu.aryanto@id.pwc.com Devesh Desai PwC US devesh.desai@pwc.com Peter Forwood PwC Australia peter.forwood@au.pwc.com Elizabeth Goodbody PwC Indonesia elizabeth.x.goodbody@id.pwc.com Michael Jones PwC UK michael.x.jones@uk.pwc.com Artem Kalinin PwC Russia +7 (495) artem.kalinin@ru.pwc.com Lars-Heiko Kruse PwC Germany +49 (0) lars-heiko.kruse@de.pwc.com Vincent Loy PwC Singapore vincent.j.loy@sg.pwc.com Ben Luddington PwC UK +44 (0) ben.s.luddington@uk.pwc.com Gianfranco Mautone PwC Switzerland +41 (0) gianfranco.mautone@ch.pwc.com Roy Melnick PwC South Africa roy.melnick@za.pwc.com Dhritimaan Shukla PwC India dhritimaan.shukla@in.pwc.com Amber Stokes Vitale PwC US amber.n.stokes@us.pwc.com Michael Weis PwC Luxembourg michael.weis@lu.pwc.com At PwC, our purpose is to build trust in society and solve important problems. We re a network of firms in 157 countries with more than 208,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwC does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

Sanctions screening global developments. ACAMS South Africa Chapter 28 June 2016

Sanctions screening global developments ACAMS South Africa Chapter 28 June 2016 Global developments Current issues driving an analytics-based approach to sanctions risk and compliance Expanding Regulatory