Sanctions List Screening to Keep Pace with Evolving Sanctions Regimes


Sanctions List Screening to Keep Pace with Evolving Sanctions Regimes

 

Amidst aggressive use of economic sanctions as an instrument of geostrategic competition, businesses face rising reputational, commercial, and legal risks. For actors in this polycrisis world, sanctions list screening has become a key compliance challenge. The complexity and sophistication of enforcement regimes requires firms to invest in building a coherent sanctions screening program. 

 

Given the scale of challenge, it is not surprising that sanctions screening has been identified as a top challenge by organizations in the 2022 Thomson Reuters Anti-Money Laundering Insights Survey. [1]Similarly, 43% of those surveyed by Deloitte cited increasing complexity as the reason for rising costs of compliance, and nearly half of the executives considered themselves at high risk for exposure.[2]

 

The Importance of Using Technological Solutions

 

Given that compliance with varied regimes requires screening consumers, business partners, and third parties across multiple jurisdictions in the supply chain, traditional methods can no longer keep pace with the ever-changing regulatory landscape. This is because manual work leaves potential for human error in data entry, data extraction, data manipulation, screening alert review, and record keeping. 

 

Institutionalizing processes by using specialist databases, is therefore, critical. Technological tools such as Optical Character Recognition (OCR), Native Language Processing (NLP), Artificial Intelligence (AI), Robotic Process Automation (RPA), and machine learning are known to be helpful in transaction screening.[3] Using a software can make the task of screening both internal and external data sources easier. Maintaining an automated feed of sanctions enables data management in as much as it allows for large amounts of incoming data to be matched against screening lists. Depending on the nature of business, doing this screening in real time can be further important, especially for financial service clients. 

 

Unpacking Complexity

 

In order to better understand the level of complexity involved, it is important to consider that restricted parties may use sophisticated mechanisms to avoid detection–for instance, by setting up shell companies or using different naming conventions leading to incorrect spellings. Screening also requires considering the ownership and control structure of the party in question. While there are technical different, the EU, UK and U.S. regulatory regimes largely follow largely the same “50 percent rule”, which requires ownership or control of more than 50 percent for the entity to be governed by the sanction.[4]

 

The purpose of any economic sanction is to “induce compliance with some international obligation that the target State has failed to observe”.[5] It accordingly follows that sanctions are instruments of coercive diplomacy, employed to check the behavior of international actors. In its study of 729 publicly traceable sanction cases over the period 1950-2016, the Global Sanctions Data Base has categorized partial and complete sanctions into Trade Sanctions, Financial Sanctions, Travel Restrictions, Arms Sanctions, and Military Assistance. The objectives of these sanctions have often included more than one policy goal, and routinely relate to concerns around democratization, human rights, ending wars, and territorial conflict. Their research has further revealed that while sanctions gradually became popular after 1950, their use has become more widespread since the early 2000s. [6]

 

While data collated by Statista has confirmed that Russia has now become the most-sanctioned country with more than 5,581 sanctions presently in place[7], Global Sanctions Dashboard by Atlantic Council indicates that sanctions also continue to be imposed against countries such as the Democratic Republic of the Congo, North Korea, and Myanmar. [8]

 

Understanding the Global Regulatory Landscape

 

While sanctions imposed by the UN Security Council under Chapter VII, Article 41 apply to all nation-states, countries also impose targeted sanctions outside the scope of the UN. Given that a bulk of the unilateral, bilateral and multilateral sanctions continue to be imposed by Western nations, it is relevant to make note of the relevant regulators. While the Office of Foreign Assets Control (OFAC) does the bulk of the regulatory heavy-lifting in the US, Departments of Commerce, State, and Treasury maintain multiple export screening lists. Similarly, EU maintains a database of sanctions imposed by the body in accordance with its Common Foreign and Security Policy, as set out in Article 21 (2) of the Treaty of EU. After Brexit, UK now maintains HM Treasury Sanctions List. In recent weeks, all bodies have indicated the need to push for a tougher enforcement mechanism.[9]

 

In the US, The Bureau of Industry and Security (BIS) at the Department of Commerce maintains the following lists:

 

  • Denied Persons List – Includes individuals and entities that have been denied export privileges. [10]
  • Unverified List – Includes end-users who BIS has been unable to verify in prior transactions.[11]
  • Entity List – Includes parties whose presence in a transaction can trigger a license requirement supplemental to those elsewhere in the Export Administration Regulations (EAR).[12]
  • Military End User (MEU) List – Includes parties that are prohibited from receiving items described in Supplement No. 2 of Part 744 of the EAR unless the exporter secures a license.[13]

 

Key sanctions lists maintained by Department of State include:

 

  • Nonproliferation Sanctions – Includes parties that have been sanctioned under various statutes for engaging in proliferation activities.[14]
  • AECA Debarred List – Includes entities and individuals in violation of the Arms Export Control Act (AECA) and the International Traffic in Arms Regulations (ITAR).[15]

 

Department of Treasury maintains the following lists:

  • Specially Designated Nationals List – Includes parties who may be prohibited from export transactions based on OFAC’s regulations.[16]
  • Foreign Sanctions Evaders List – Includes foreign individuals and entities determined to have violated, attempted to violate, conspired to violate, or caused a violation of U.S. sanctions on Syria or Iran.[17]
  • Sectoral Sanctions Identifications (SSI) List – Includes persons operating in sectors of the Russian economy with whom U.S. persons are prohibited from transacting in.[18]
  • Palestinian Legislative Council (PLC) List – Includes members of the PLC who were elected on the party slate of Hamas, or any other Foreign Terrorist Organization (FTO), Specially Designed Terrorist (SDT), or Specially Designated Global Terrorist (SDGT).[19] 
  • Correspondent Account or Payable-Through Account Sanctions (CAPTA) List – Includes Foreign Financial Institutions Subject to CAPTA.[20]
  • Non-SDN Menu-Based Sanctions List (NS-MBS List) – Includes persons subject to certain non-blocking menu-based sanctions that have been imposed under statutory or other authorities, including certain sanctions described in Section 235 of the Countering America’s Adversaries Through Sanctions Act (CAATSA), and the Ukraine Freedom Support Act of 2014.[21]
  • Non-SDN Chinese Military-Industrial Complex Companies (CMIC) – Includes persons subject to sanctions aimed at “Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies”.[22]

Customs and Border Protection maintains a list of entities found to be participating in the forced labor and repression in China, the “UFLPA List.”

Exploring Screening Solutions

 

While the lists consolidated at government websites and in public databases such as the Global Sanctions Dashboard maintained by The Atlantic Council are updated online, there is much to gain by subscribing to technological solutions that can help streamline the compliance requirements.[23]  

 

The greatest advantage of using a third-party provider of list screening is the flexibility they may afford in integrating with a firm’s existing ERP and CRM systems.

 

Given below is an indicative list of some firms that provide sanctions screening solutions with an eye on the regulatory and compliance requirements. 

 

Descartes, https://www.descartes.com/solutions/customs-and-regulatory-compliance

Acuant, https://www.acuant.com/sanctions-screening-pep-solution/

CSI, https://www.csiweb.com/how-we-help/regulatory-compliance/sanctions-screening/

Castellum, https://www.castellum.ai/russia-sanctions-dashboard

Deloitte, https://www2.deloitte.com/us/en/pages/advisory/solutions/anti-money-laundering-advisory-services.html

Gan Integrity, https://www.ganintegrity.com

Lexis Nexis Risk Solutions, https://risk.lexisnexis.co.uk

Oracle, https://www.oracle.com/industries/financial-services/aml-financial-crime-compliance/sanctions-screening/

Protiviti, https://www.protiviti.com/US-en/insights/sanctions-screening-systems

Pwc, https://www.pwc.com/us/en/industries/financial-services/financial-crimes.html

Refinitiv, https://www.refinitiv.com/en/risk-and-compliance/financial-crime-risk-management/sanctions-screening

Thomson Reuters, https://legal.thomsonreuters.com/en/products/clear-investigation-software

 

Entities that are majority owned by sanctioned actors, but do not appear on a sanctions list, are subject to OFAC’s “50 Percent Rule” and its EU equivalent, and are therefore considered “sanctioned-by-law.” An example would be Rostec, the Russian defense conglomerate with over 800 associated entities. There are no official lists aggregating this potential exposure.   

 

Kharon’s 50-Plus dataset provides what many in the field consider the most comprehensive coverage on entities majority owned — directly, indirectly, or in the aggregate — by sanctioned actors

Month / Year / Volume / Number July 2022 - Vol 36, Num 7


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