Banks and financial institutions are subject to a web of labyrinthine global financial compliance requirements. This is due to the need to ensure that international financial transactions are not supporting terrorism, criminal activity or the proliferation of nuclear weapons. In the latest Precision Report we look at areas of risk as well as strategies to ensure ongoing financial compliance.

In 2014, an international banking group with a presence in 73 countries made headlines for all the wrong reasons. The bank — whose name you undoubtedly know — was the recipient of the largest ever penalty issued by the US Treasury Department’s Office of Foreign Assets Control (OFAC). The amount? An eye watering $8.9 billion for violating sanctions against Cuba, Iran and Syria.

OFAC can and does impose large fines on banks that violate sanctions. In 2012, it penalized another large international bank $1.9 billion for breaching sanctions against Burma, Cuba, Iran, Libya and Syria. That’s an amount that makes the $7.6 million fine imposed on a world-famous electronic payments system seem paltry.

Banks that work internationally are subject to a host of financial compliance regulations. The United Nations, as well as the United States, the European Union and most nation states have complicated financial compliance laws. Banks must also take into account complex trade regulations, embargoes and sanctions. Financial institutions that process transactions from denied parties, fail to comply with sanctions or contravene anti money laundering laws can face hefty penalties, even if they do so unwittingly. Few watchdogs have the tenacity or as wide a jurisdiction as the OFAC.

Big Fines, Long Reach — OFAC

The OFAC, often described as the US government’s “most powerful yet unknown” agency, can sanction organizations and entire countries. US financial firms must, of course, comply with OFAC regulations. So must many international banks, where ever they are. OFAC claims jurisdiction over non-US entities and people if they use the US financial system. The agency can target anyone with a US bank account or who makes or receives payment in US dollars. Given that the US dollar is the de facto global currency, OFAC can exert its powers around much of the world.

European banks know this to their cost. Before 2015’s Joint Comprehensive Plan of Action — the Iran nuclear deal — the OFAC imposed more than $16 billion in fines on European banks for turning Iranian oil revenue into US dollars. Hardly surprising then that even before the recent US withdrawal from JCPOA, major banks were wary of working in Iran.

The OFAC also has the power to freeze assets. This June, the agency placed four companies, one research institute and three Russian individuals on their sanctions list, freezing all assets. The agency also barred US companies and individuals from doing business with them. The organizations and individuals were sanctioned for assisting the FSB — Russia’s Federal Security Service, itself sanctioned for interference in the 2016 US election.

The OFAC is not lax in pursuing violations. Compliance is therefore a must. However, the agency has multilateral and complex regulations, which makes compliance challenging. These regulations are also subject to change at short notice, but banks and financial institutions must quickly respond.

So Many Rules, So Little Time — Sanctions and Denied Parties

Financial compliance is mission critical for banks. However, keeping up to date with various international and national regulations can be daunting. Sanctions are not always straightforward. Banks and financial services firms may be eligible to do business in sanctioned countries under certain circumstances. In such a case, licensing is generally required. However, these licensing requirements can change at short notice.

In addition to obeying sanctions, banks must not process transactions from denied parties. The UN, the US and the EU, plus international and national agencies publish Denied Party Lists (DPLs). These identify persons involved in illegal activity. It is a financial compliance violation to conduct business with groups or individuals on DPLs. DPLs are not static — individuals are added and removed regularly. Compliance departments can be hard pressed to keep up with the thousands of changes that occur annually.

Filthy Lucre — Anti Money Laundering Laws

Anti money laundering laws help to curb terrorism financing, the narcotics trade and financial fraud. In the United States, financial institutions must identify and assess the risks presented by their customers, products and services. They must also consider their geographic exposure and whether criminals or terrorists could exploit their delivery channels.

On 11 May 2018, FinCEN’s Final Rule came into effect. FinCEN, the Financial Crimes Enforcement Network — a bureau of the US Treasury Department — set out new Customer Due Diligence (CDD) requirements. Under the Final Rule, banks who do business with legal entities must be able to identify the people who own or control them. These CDD requirements are in part a response to the Panama Papers and the Paradise Papers. The Final Rule aims to prevent the use of offshore accounts, trusts and shell companies to hide funds, evade taxes and launder money.

Similar laws exist in the EU. Directive (EU) 2015/849 combats the use of the EU financial system for money laundering or terrorist financing. Under this directive, EU banks cannot engage in business without completed CDD documentation which identifies and verifies their customers. This includes identifying individuals who exercise ownership or control over legal entities.

Global banks and financial firms must also comply with Financial Action Task Force (FATF) guidelines, wherever they apply. FATF — the international standard setting body for combating money laundering and terrorist financing — has a series of forty “Recommendations.” FATF member countries must endorse and support these recommendations, and work to legislate for them. Thirty-five countries and two regional bodies — the European Commission and the Gulf Cooperation Council — are members.

Brexit, NAFTA and the Uncertainties of Global Trade

The laws that govern the workings of financial institutions are contingent upon the political and trading environment. In recent years, protectionism has been on the increase, and international trade co-operation is under threat. Some seemingly robust trade agreements and relationships have been strained. Britain’s Brexit decision surprised many. As yet, there is no agreement as to what the trading relationship between the UK and the EU will be post-Brexit. It is clear, however, that the severing of the close financial and trade ties between the UK and the bloc will add extra complexity for banks and financial institutions operating in this region.

Banks working across North America may face similar issues if the current NAFTA negotiations are not resolved. The talks have been fractious, prompting dire warnings about preparing for a post-NAFTA economy. If that happens, banks operating in North America will need to comply with differing US, Canadian and Mexican national regulations.

Remaining Compliant in a Complex World

It’s clear that financial compliance is a major issue for banks. To ensure they do not commit violations, banks need comprehensive compliance procedures. Screening clients against DPLs is labor intensive and prone to errors. Furthermore, in a world where banking increasingly takes place online, ensuring all transactions comply with anti money laundering laws is simply not possible. Banks can leverage technology to assist with this challenge.

PRECISION Automated Global Trade Compliance Software helps banks keep up-to-date with changes to regulations and DPLs. Our software screens trading partners and helps manage licensing requirements to mitigate risk. In addition, the solution creates a permanent audit trail of compliance checks and results for each transaction. It provides the oversight required without disrupting business. The PRECISION solution is also configurable and extensible according to a bank or financial organization’s needs, integrating, for example, Global Trade Management and Transportation Execution.

The landscape of global trade is ever shifting, but whatever changes occur, compliance is an ongoing requirement. The penalties for financial institutions that violate the rules are costly. A bank that flouts regulations does not just pay penalties — they do great damage to their reputation, losing the trust of their customers and shareholders.

About Precision Software – Trusted Global Trade And Transportation Execution

Precision Software, a division of QAD Inc., provides industry-leading global trade management, transportation execution and multi carrier shipping software solutions from a single, integrated platform. Preeminent industry leaders in every region of the world rely on our global support centers to leverage thousands of carriers and manage millions of shipping transactions every day. The PRECISION solution’s open architecture allows for easy integration with leading Enterprise Resource Planning (ERP), Warehouse Management Systems (WMS) and existing legacy solutions. An ISO-certified company, Precision Software assists companies around the world to minimize shipping costs, optimize first mile and last mile deliveries, avoid compliance delays and mitigate the risks associated with dynamic trading environments. Precision Software’s customers span multiple industries including banking and finance, life sciences, high technology, retail, industrial, automotive, higher education and public sector as well as logistics providers. For more information about Precision Software, visit