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The Impact of Sanction Regulations on Financial Institutions

The Impact of Sanction Regulations on Financial Institutions. Andrew Croker 1st June 2011 . Agenda. Sanction Regulations Requirements for Financial Institutions Problems Solutions. The basics of KYC. Who? Where? What?. Sanction Screening.

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The Impact of Sanction Regulations on Financial Institutions

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  1. The Impact of Sanction Regulations on Financial Institutions Andrew Croker 1st June 2011

  2. Agenda • Sanction Regulations • Requirements for Financial Institutions • Problems • Solutions

  3. The basics of KYC • Who? • Where? • What?

  4. Sanction Screening Financial Institutions are required under Section 25 of POCDATARA (Prevention of Constitutional Democracy Against Terrorist and Related Activities Act) to ensure that they do not conduct business with any individual or entity who commits, or attempts to commit, any terrorist or related activity in accordance with UN Resolution 1267 (UN 1267 list)

  5. UN 1267 • United Nations Security Council Resolution 1267 of 1999 • Outlaws Taliban & Al-Qaida • 92 Entities; 396 Individuals (May 2011)

  6. “Alleged member of narcotics syndicate. Dec 2005 - arrested on charges of alleged narcotics trafficking (cocaine rocks) (mandrax tablets). Escaped from custody, whereabouts unknown.”

  7. Sanction Screening When conducting cross border transactions in foreign currencies, certain countries require actions to be performed to prevent and suppress the financing of terrorism and terrorist acts – OFAC; HMT list; EU List

  8. Cross-border Transactions Bredenkamp v Standard Bank 2010 (4) SA 468 (SCA): “The Bank was also apprehensive of the possibility that any continued relationship with the appellants would create material business risks. Although the Bank itself is not bound to comply with the listing, many financial institutions with which it conducts business internationally are. These financial institutions impose stringent obligations in respect of the correspondent accounts they offer to banks such as the respondent. Any misstep by the Bank concerning a client who is an SDN could lead to the seizure of funds transferred in bulk on behalf of a number of clients, to a closure of accounts or to an adverse report to OFAC. It follows that it was not only the Bank’s reputation that it felt was at risk but that there were also material business risks.”

  9. Sanction Screening “The FIC stresses the need for businesses to go beyond formal compliance, taking the next steps to become good corporate citizens. Greater public awareness of the need to combat money laundering and terrorism financing reinforces these goals and strengthens the overall system.” – FIC Annual Report 2009/2010

  10. “Alleged narcotics trafficker. Associate of Barbara Nona Mazibuko. Oct 2006 - sentenced to 22 years imprisonment for alleged narcotics trafficking.”

  11. FATF 40 + 9 Recommendations • Financial Action Task Force • The 40+9 Recommendations, together with their interpretative notes, provide the international standards for combating money laundering (ML) and terrorist financing (TF). • 40 Recommendations to combat Money Laundering • 9 Additional Recommendations to combat Terrorist Financing

  12. FATF Recommendations • Recommendation 5: • Client Due Diligence • Ultimate Beneficial Ownership • Recommendation 6: • Politically Exposed Persons

  13. “Director of Health and Community services for Hibiscus Coast Municipality (reported Jun 2009 - ). Siyabonga Cyprian Cwele (PEP) (spouse). Mother of 4 children. Dec 2009 - under investigation by Directorate of Public Prosecutions for alleged links to a narcotics syndicate. Jan 2010 - arrested on charges of dealing or conspiring to deal in narcotics (cocaine), procuring a woman to collect narcotics in Turkey and procuring a woman to smuggle cocaine from South America. Denied charges. Feb 2010 - released on ZAR100,000 bail.” “Minister of State Security (May 2009 - ). Minister of Intelligence (Sep 2008 - May 2009). Member of Parliament (Apr 2004 - ). Chairman of Parliamentary Committee for Intelligence (Apr 2004 - ). Member of African National Congress (ANC). Sheryl Cwele (spouse). Father of 4 children.”

  14. “Managing Director of Scharrighuisen Drilling (Pty) Ltd. Found guilty of insider trading. Administrative penalty of ZAR1m imposed.”

  15. V&A Waterfront Michelangelo Towers Bakubung and KwaMaritane Bush Lodges Airport Grand

  16. FATF Evaluation of RSA in 2008 Recommendation 5: Partially Compliant There is no specific requirement that accountable institutions apply enhanced due diligence for higher risk categories of customers, business relationships or transactions. Recommendation 6: Non-compliant No enforceable obligation for financial institutions to identify politically exposed persons (PEPs) or take other such measures as indicated in Recommendation 6. The next SA Review is in 2012 . . .

  17. What do we need to do? Onboarding • KYC (CIP) • CDD • IDV • EDD • Sanctions check • PEP check • Other: • risk checks • credit checks • etc • Are they who they say they are? • Do they live where they say they live? • Are they a risk to us?

  18. What do we need to do? Onboarding Ongoing Screening • Sanctions • CTF • AML • PEPs (EDD for senior, foreign PEPs) • Other risk (e.g. terrorism, proliferation, market abuse, insider trading, etc) • KYC (CIP) • CDD • IDV • EDD • Sanctions check • PEP check • Other: • risk checks • credit checks • etc • Are they who they say they are? • Do they live where they say they live? • Are they a risk to us? • Do we still know our customer? • Can we be sure they haven’t changed status? • New information • Adverse news • Sanctions list/PEP updates • Are they still the customer we on-boarded?

  19. Problems • Regardless of customer base, a manual process to screen all customers on a regular basis in compliance with the FATF Recommendations is impossible. • Even with an automated system, the burden on resources due to False Positives is massive. • Difficult to deploy consistent policies, rules, systems and controls throughout the organisation. • Discrepancies in Customer and List Data complicate matching. • Different Language and Character sets make cross-referencing difficult.

  20. Ideas OVER-MATCHING?

  21. MIDDLE EAST NEWS • APRIL 19, 2011 International banks, acting on government orders to freeze assets from Libya, Egypt and Tunisia, are scouring hundreds of millions of client files for individuals on the new watch lists. But in doing so, bank compliance officers are grappling with a peculiar challenge: the myriad ways of transliterating Arabic names.

  22. What to look for when Evaluating an Automated Screening Solution

  23. Requirements of an Automated Solution In order to absorb as much of the impact of Sanctions Screening as possible, a system must meet the following minimum requirements: • Highly Flexible. • Batch Processing Capability. • Efficient Real Time Screening. • Sanctions, PEPs, SIPs, Local Lists, UBO sources. • Sanction List Data agnostic. • Easily adapted for additional data streams. • Intelligent workflow. • Risk-based Prioritisation • Decision Persistence. • Structured and Unstructured Data. • Multiple Languages and Character Sets. • AUDITABLE

  24. The Datanomic Solution dn:Sentry for Customer Screening Case Management Data Optimisation Screening Algorithms Case Management Workflow Auditability MI/Reporting

  25. Thank-you “Delivering Industry Best Practice in Risk & Compliance Screening” BATELEUR SOFTWARE

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