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Many companies have deficiencies in their sanctions risk management and customer due diligence processes, according to a survey by the UK’s financial regulator. The EU has also published new expectations about companies’ third party due diligence for risks related to sanctions, particularly for companies operating in Russia and Belarus.
In this blog, we look at these latest developments in global sanctions, and explore how companies should respond by improving their management of sanctions risk–with help from Nexis® Solutions.
The Financial Conduct Authority (FCA), the UK’s financial regulator, has now released the results of their survey of over 90 companies to understand more about how they ensure they do not breach international sanctions. Companies’ responses revealed several common deficiencies, including:
MORE: The new era of due diligence
The European Commission released guidance last month to help companies operating in Europe to “identify, assess and understand the possible risks of sanctions circumvention”, as well as “how to avoid it” when doing business with third parties in non-EU countries. This publication was prompted by the recent sanctions imposed against Russia and Belarus, which the Commission says has created an “increased risk” that companies will find themselves in breach.
The guidance for companies includes:
MORE: Recent regulatory enforcement shows the need for due diligence
These two regulatory interventions reflect that sanctions risk has increased since the conflict in Ukraine began. Boards of companies should therefore be concerned about the findings of the FCA’s survey, which suggest many firms are not adequately set up to identify and manage sanctions breaches–and exposed to financial, legal, reputational, and strategic risks as a result.
Sarah Pritchard, a director at the FCA, offered advice to firms at the Financial Crime Summit when presenting the survey results. She said companies should not simply carry out “tick box” exercises for compliance, and that “taking early action can save millions in fines down the line as well as the reputation of firms.”
Both regulators offer consistent advice in how firms should mitigate the rising risks of sanctions. The FCA said firms should take a “risk-based approach” to their compliance by understanding the level of risk they face, then managing those risks in a “proportionate” way. While the European Commission recommended that companies assess the level of sanctions risks of third parties, then carry out enhanced due diligence where the risk is elevated.
MORE: The changing roles of risk managers in the age of technology
A risk-based model of sanctions screening requires companies to have access to authoritative, trustworthy and comprehensive data on sanctions risks. This should include:
Developing a bank of this data is a near-impossible task for a compliance team to do by themselves, as it would absorb vast amounts of staff time in manually searching through databases. Instead, technology platforms can be brought in to screen names of entities against multiple large sets of data which are regularly updated to reflect any changes to sanctions risk.
Nexis® Solutions is a leading example of how technology can be leveraged to surface sanctions risks from comprehensive data. Contact us today to discuss how it might help your sanctions approach.