Managing the global geopolitical environment and techniques to stay ahead of fast moving sanctions regimes

Andrew Jensen, Managing Director and Global Head, Global Sanctions & Screening (GSS), Scotiabank

Below is an insight into what can be expected from Andrew’s session at Fraud & Financial Crime USA 2023.

The views and opinions expressed in this article are those of the thought leader as an individual, and are not attributed to CeFPro or any particular organization.

What impacts can sanctions have on investors and investment decisions?

Investors must consider the potential risks and returns while making investment decisions. When sanctions are imposed on targeted countries, entities, individuals, or sectors, the investment vehicles associated with such targets can expect to face

embargoes, asset freezes, travel bans, etc. Therefore, such investment opportunities become less attractive to the investors. In fact, this is the purpose of economic sanctions, to deter and restrict undesirable conducts through diplomatic or foreign policy agenda.

How can banks look to manage sudden changes in sanctions compliance?

A well-developed change management program can guide banks to better manage sudden changes in sanctions compliance. It is important to understand that having the knowledge of the newest developments in regulatory changes is only one aspect of this change management process. To manage changes effectively, relevant stakeholders of the sanctions compliance program ecosystem will need to be engaged to work through various details, including the scope, timeline, technology requirements, resource availability, dependencies, and training.

For large scale transformation initiatives, all the essential components associated with a sanctions compliance program will need to be incorporated into the change management process. This includes securing the commitment from senior management, conducting risk assessment on the affected areas, developing suitable internal controls, testing, and training, as suggested by the Sanctions Compliance Framework developed by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC).

How can banks look to identify risk exposure within portfolios and business lines?

A good starting point is to develop an adequate sanctions risk assessment program to review the organization’s entire payment ecosystem holistically. Depending on a bank’s risk profile, the areas may include its customers, intermediaries, counterparties, products, services, and the geographic locations involved.

The results of a risks assessment should reveal potential threats and vulnerabilities that are associated with an organization’s inherent risks. The organization should then leverage such results to develop a strategic roadmap to guide its risk-based decisions and implement relevant controls.

What are the risks of secondary sanctions?

The secondary sanctions under the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) target non-U.S. persons extraterritorially, effectively preventing countries, businesses, and individuals from trading with designated targets that are subject to sanctions issued by the U.S.

Therefore, if non-U.S. persons or entities undertake financial transactions with targeted countries, entities, or individuals, they will be subject to a significant risk of being banned from conducting any banking activities with any U.S. based financial institutions, businesses, and individuals, in addition to have the assets frozen by a financial institution that is subject to the U.S. jurisdiction.

Why should banks look to develop consolidated escalation protocols?

Consolidated escalation protocols allow relevant decisions to be made based on a consistent approach toward the interpretation of policies, frameworks, standards, and procedures guided by the organization’s Risk Tolerance Framework (RTF).

Banks typically have multiple business lines and segments based on the characteristic of the customers they serve, products they offer, or geographies where they operate. While there should not be a one size fits all approach for all the activities throughout the entire decision-making process, having a centralized internal control function, including implementing consolidated escalation protocols, is essential to maintain consistent interpretation and application of the requirements associated with Banks’ policies, procedures, and documentation across a Bank’s footprint.