Financial institutions are usually the ones who suffer the most risk and compliance issues from possibly sanctioned clients. Many sanctioned entities use discrete methods to shield their true identities. This helps them go undetected by the screening lists and watchlists. Sanctions Due Diligence is a critical method of protecting the reputation of the financial institution.
Many financial institutions and companies dealing with foreign entities use the screening lists to detect illicit actors. However, the entities in sanctioned jurisdictions use innovative ways to make sure that they are able to carry out their normal trading and financial activities despite it imposed on them.
It is very important for financial institutions to background-check all of their clients. This is to make sure they are not inadvertently dealing with sanctioned entities. Breaching them can be a very serious offense, even if it is unintentional.
Unintentionally breaching sanctions can be chalked down to a company being negligent in its screening and checking procedures. Hence, all companies must comply with local and international sanctions to prevent facing heavy fines or prosecution. This is the sole reason why sanctions due diligence has become a significant process in financial institutions.
How to apply sanctions due diligence to different lines of business?
Attempting to operate under sanction and money laundering are quite similar. In both cases, the perpetrator wishes to move their money without revealing the true nature of the source of the cash. Hence, they may use similar methods to conduct operations. It is necessary for companies to comply with AML and KYC guidelines. They must also conduct sanctions due diligence and screen all their clients to make sure they have no prior transgressions.
Luxury Goods
Many criminals tend to sink their black money into luxury goods or high-value purchases like property, automobiles, and the like. This helps them discretely dispose of their wealth as well as ensure that it does not go to waste. It is quite easy for sanctioned entities to purchase luxury goods. This is because most luxury goods sellers are quite lax when it comes to doing background checks on their customers. They cater to all types of people as long as they are willing to pay exorbitant prices for their products.
Many money launderers or sanctioned entities use shell companies to invest in luxury goods. Luxury good companies do the minimum when it comes to performing customer due diligence, which makes them a willing target for money launderers.
The best way for these companies to comply with KYC norms would be to enhance their screening processes. It is common knowledge that the luxury goods sector doesn’t deal with the cleanest money. It’s high time that these companies step up their screening processes and deal with watchlisted clients accordingly. Continuing to cater to such entities helps to fund and foster illicit businesses and dangerous activities. These are exactly what intergovernmental bodies like the FATF and the UN are aiming to minimize.
Virtual Currencies
Another sector that is at sanction risk of inadvertently supporting sanctioned entities is the Fintech sector. The popularity and use of virtual currencies are rising day by day. This is thanks to the ease of use and anonymity it offers. Blockchains are decentralized, meaning that the general public can use them without going through extensive background checks or complying with KYC norms.
Centralized entities like banks require all of the customers to comply with these norms to protect their funds and credibility. However, since the same rules do not apply to virtual currencies, it has made them quite popular for suspicious organizations to transact with.
Sanction countries like Russia, North Korea, and Venezuela have been observed to heavily invest in cryptocurrencies, and use them to carry out trades. This has come to the OFAC’s notice, which has clamped down on US citizens dealing with cryptocurrencies originating in sanctioned countries.
Correspondent Banks
It is important for correspondent banks to follow all the sanctions due diligence process as they deal with local and international clients alike. The OFAC has developed a number of risk-based approach programs to screen cross-border transactions. These are at the highest risk of being initiated by entities in sanctioned jurisdictions.
Both the US and the UK have instructed FFIs that are outside of their borders to comply with their guidelines when conducting cross-border transactions. They are also required to report any failed transactions to the OFAC and the OFSI so they can probe into the nature of the transaction, and if it was indeed initiated by a sanctioned entity.
Beneficial Ownership Calculation
A beneficial owner is a person who can enjoy the same benefits as an owner of the company without actually being a legal owner. Sanctions Due Diligence focus on the identification of the beneficial owners and their association with sanctioned jurisdictions. The most common example is being a shareholder or stakeholder of a company. These owners usually hold temporary ownership of part of a company and can influence their decisions and proceedings to an extent.
So, if any governmental or inter-governmental body sanctions a company, how will this affect the beneficial owners? According to the OFAC, these parties are only subject to sanctions if they own more than a 50% stake in the sanctioned company.
Any financial institution may also halt transactions if they are dealing with an entity a sanctioned individual or company owns more than 50% of.
In many places, the legal owners are simply acting on behalf of the beneficial owners. The beneficial owners may not want their names to appear on public records. To ensure this, they do not assume legal ownership of an entity. In many cases, the beneficial owners may end up being criminals or sanctioned individuals. Hence, it is important to screen all owners- both on paper and off it.
Conclusion
Sanctioned entities and money-launderers usually deal in the same sectors. They mostly target areas where regulations are lax. This allows them to conduct illicit activities without undergoing extensive background checks and being caught.
They commonly use shell companies, trade vehicles, or other inconspicuous methods to conduct their activities. Many true owners also pose as beneficial owners to conceal their true identities. Hence, companies dealing with risky sectors must always conduct extensive due diligence so that they do not end up accidentally breaching them. There are a variety of ways in which they can do so. The most common way to do so is to screen all clients against OFAC, OFSI, and UN watchlists.
