Deconstructing today’s volatile sanctions landscape
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Transcript of Deconstructing today’s volatile sanctions landscape
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The Rise of GATCAPreparing for the new reality of global tax compliance and account reporting systems
Deconstructing Today’s Volatile Sanctions Landscape – How to
Keep Your Institution Protected
ACFCS WebinarSeptember 10, 2014
Presented ByPascal Aerens, Head of Product Strategy, Fircosoft
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Daniela GuzmanAssistant Editorial Director
Association of Certified Financial Crime SpecialistsMiami, FL
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Certification, News, Guidance, Training, Networking
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The Credential That Demonstrates Competency and Skill Across the Financial Crime Spectrum
CFCS Certification
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Deconstructing Today’s Volatile Sanctions LandscapeChallenges, Trends and Best Practices
Pascal AerensHead of Product Strategy
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World news, UkraineIran, Russia and the changes in sanctions
Global trends in Compliance, andhow to adapt
Questions, answersand further exchangeof views.
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How the Arab Spring, Iran and Ukraine changed sanctions for ever
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A changing world
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Friends can change quickly
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Libya
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Syria
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Egypt
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Egypt
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Egypt
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Iran
Possible switchfrom total sanctions to targeted sanctions
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Iran
New sanctions (29 Aug)Deadline set to Nov 27Uncertainties on deal
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Africa Africa
Nigeria: Boko Haram, AnsaruSomalia: al-ShabaabSudan Cote d’ivoire, CAR, Mali…AQIM
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Source:
Libya
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Iraq
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Syria
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Islamic State
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Islamic State
Extortion
Hostages
Oil
Donations
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Islamic StateAl Hayat Media CenterTwitter + video multi-language (including EN)
Al Furqaan Media ProductionsMilitary operationsIslamist forums
MT MujatweetsAdvertisement videos featuring westerners who joined jihad
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Ukraine
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An intermediary diplomatic escalation tool
Between condemnationsand warS
anct
ions
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Political situation can change completely overnight.
Sanctions remain the favorite tool to pressure hostile groups.
Banks remain a critical point to implement them.
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Shifting the cost of foreign policies to the banks Financial warfare
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Who will be the bad guy tomorrow ?
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Today sanctions are US centric
Burma
Côte d’Ivoire
Sudan
North Korea
Iran
Belarus
Lebanon
Somalia/Eritrea
Guinea
Tunisia
Syria
Libya
Egypt
201120102009200820072006
Burma
Côte d’Ivoire
Sudan
North Korea
Iran
Belarus
Lebanon
Somalia/Eritrea
Guinea
Tunisia
Syria
Libya
Egypt
201120102009200820072006
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Today sanctions are US centric
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GlobalPower index
Source: National Intelligence Council
but tomorrow in a multipolar world ?
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Focus on the sanctions against Russia
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Global map
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Language divide in Ukraine
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January 2014 protests
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Crimea annexed, SE of Ukraine unrest (Feb ‘14)
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Sanctions first round announced (March ‘14)
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MH-17 (July ‘14)
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Who is next after Crimea ?
Source: National Security and Defense Council of Ukraine
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NATO expansion (1949-2009)
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Russian GDP growth forecasts
Source: ICEF Monitor
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Energy independence critical for EU
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Gas pipelines running through Ukraine
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What is special about the Russian sanctions?
UN Security Council permanent member Important economic partner (mainly for Europe) Indirect sanctions (50% rule) Sanctioned entities all have Russian names
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Sanctions
Source: BBC
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Summary
First Round (March) Two Executive Orders imposing sanctions on 31 individuals in Russia
and Ukraine and one Russian Bank. No restriction on trade and investment with Russia, except with the
sanctioned persons. Entities where these persons have more than 50% direct or indirect
ownership are also off-limits. Text foresees both ownership and control
New round (Joint EU/OFAC, Aug 1st) Adds dual-use goods, arms, energy and imposes restrictions to
access to capital markets for 5 banks (Sberbank, VTB Bank, GazpromBank, VneshcomBank and RosselkhozBank)
On OFAC there are 2 more banks (Bank of Moscow and Russian Agricultural Bank) so USD transfers must be blocked
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Normal sanctions implementation path
Resolutions
Memberstates
UNSecurityCouncil
ImplementSanctions
US EU
ImplementSanctions
ImplementSanctions
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The 50% rule
Compared to the rest of the SDN entities, the 50% rule is something specific to these executive orders: If a sanctioned entity owns more than 50% of entity X,
then transactions of X have to be blocked as well, even though X does not appear explicitly in the list.
This requires the KYC and Due Diligence processes to find Ultimate Beneficial Ownership in order to assess that an entity is “clean” Potential high cost for compliance Manually intensive process Will slow down onboarding in some business lines Risk-based approach
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Example
Controlsboard membership
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ExampleAct with caution
Controlsboard membership
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Sanctions on Russian oligarchs
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Detection challenges : due diligence
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Detection challenges : Russian name topologySECHIN, Igor; DOB 07 Sep 1960; POB St. Petersburg, Russia (individual)
Looking for Игорь Иванович Сечин ?
No patronymNo cyrillicOFAC
PEP listPatronymOriginal Script (Cyrillic)not necessary if detection enginesupports transliteration
Nationality (structured)
Occupation(s)
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Complexity of indirect holdings
Igor Sechin Vladimir Putin
associate
CEO
UnitedShipbuildingCorporation Board
member
Zvezda shipyard
100%50%
Shipbuilding Co(Finland)
partner
Joint-venture
Energy (Italy)
13%
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Impacts on business lines
Private banking KYC/AML procedures. KYC monitoring. Direct relation with sanctioned person or indirectly through investment vehicle.
Trade Finance All operations Asset Management Risk for asset manager to hold debt
or securities of a company owned by a sanctioned person
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Impacts on trade finance
Blocked operationsIdentical as for other SDN entities, but with 50% rule.
What to look for ?Content of trade finance financial messages (L/C) look for individuals, companies that are listed or associated to listed entities
Danger of intermediaries or subsidiariesTrade messages often include many counterparties, each in different roles. Not all roles are directly part of the operation, so sanctions may or may not apply (beware of indirect ownership here)
Risky industriesTrade finance in domains (Energy, Oil, Arms…) listed in sanctions
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Sanctions effectiveness
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Meanwhile in Moscow
In Russia, situation is seen as business as usual Sanctions are presented as having few impact. Business
has always to adapt to specific situations in Russia anyway, so nothing unusual.
There are concerns that sanctions could be expanded beyond the current scope, which could really hurt business.
The VISA and Mastercard transactions halt have created a short panic, as Russia discovered how dependent they were on these (US-controlled) networks. Announce of a Russian credit card routing solution just after was meant to show this situation may not last.
Service has been restored, in practice Russia remains dependent from the networks for the years to come
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Since the whole idea was to boost domestic approval rate of Putin, Russia responds aggressively and is defiant about current and future sanctions.
Much talk and threats of imposing sanctions on the Russian side on EU and US companies and individuals.
A few US government members under travel ban (more a rhetorical move than real sanctions)
Small retaliation actions on US firms or close EU (ex-USSR) countries, but denied to be linked with sanctions.
So far, nothing strong enacted, but if EU/US sanctions are further expanded, it is understood there will be a reaction.
Meanwhile in Moscow
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Russia vs. Ukraine on CDS spreads
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Russian net capital flows
Source: Central Bank of Russia
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Increased volatility in Russian stocks
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Ruble / USD
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Oligarchs loyalty maybe a key element the punished
the independents
the loyalists
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Evolution of situation
Today: Crimea accepted as de facto partition Putin accepts Porochenko as president, but no real dialogue The goal for Russia is a neutralization of Ukraine Strategy is to make sure Ukraine is too busy fighting rebel groups to
concentrate on building a stable and prosper country. Gazprom used as an extension of the Russian foreign policy
(double-edged sword, Russia also wants to appear as a reliable energy partner, and its GDP strongly depends on this income)
Possible reactions from the West Extension of sanctions with 3rd round (with possible EU/US rift) Renewed VISA/MasterCard network shutdown
(also double-edged, could profit to UnionPay) Escalation to proxy war (EU/NATO vs. Russia) Revival of anti-monopoly action from EU against Gazprom Boycott of 2018 Football World Cup Acceleration of alternative gas pipelines projects in EU
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Trends in sanctions
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Evolutions in the sanctions compliance market
RegulatoryEvolutions
Sanctions are used more and more as a political tool They are not only targeting terrorism financing Regulators want banks to demonstrate they understand
their filtering tool.
SanctionsVelocity
Sanctions can become active extremely rapidly: it can only take days between the moment sanctions are threatened and they are enforced.
Banks have to be capable of fast & flexible deployment
SanctionsComplexity
In the future, sanctions will become increasingly complex: targeting selected individuals or groups, sectorial sanctions (dual-use materials), specific transaction types…
Banks need adaptable systems to cope with this.
ComplianceCost increase
The operational cost of compliance has grown to a point where it has become one of the major cost items
Banks are taking drastic actions to reduce this cost Software cost is minimal compared to cost of personnel
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Detection challenges : relationships
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Analytics at the heart of future solutions
KYC / CDDTransaction screening
Content & PolicymanagementCase Management
ANALYTICS
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Importance of data availability and quality
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The cost of compliance
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Compliance cost vs. Regulatory Pressure
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Reduce compliance cost
Consolidation of servicesConsolidation of servicesProcess streamliningProcess streamliningAutomationAutomation
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Rise of the robots
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Machine learning loop
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Reducing costs: auto-resolution
Automates decisions on repetitive transactions Allows teams to focus on new or complex alerts Can proactively scale to handle volume increase Compelling ROI
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How does it all fit together ?
Sanctionsvelocity
Volatile political situation
Cost of compliance
Increase in fines and penalties
Agile solutions
Automation
Added-valuecontent
Managedservices
Analytics
MultipolarWorld
Lower risk appetite
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More agile and smart solutions for a fast-moving world
More complex and specific
sanctions demand new Content
future of compliance solutions
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