In April 2020, a well-known financial services company was found
to have violated nuclear proliferation sanctions through human error
and gaps in the firm’s screening process. In this QAD Precision
Report we look at areas of risk for banks and financial firms as
well as strategies to ensure ongoing financial compliance.
On 30 April 2020, a well-known financial services company was issued
with a finding that it had violated sanctions regarding the
proliferation of weapons of mass destruction. The US Treasury
Department’s Office of Foreign Assets Control (OFAC) found that the
company had issued a prepaid card to, and processed financial
transactions totaling $35,246.82 on behalf of a person on the
Specially Designated Nationals (SDN) list. Luckily for the bank, OFAC
also found that the violations were not the result of a wilful
flouting of the law, but rather human error and alongside gaps in the
company’s screening process.
Fine for violations of financial compliance laws can be very
steep. In 2014, an international banking group with a presence in 73
countries made headlines for all the wrong reasons. The bank was the
recipient of the largest ever penalty issued by OFAC. The amount? An
eye watering $8.9 billion for violating sanctions against Cuba, Iran
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.
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
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, wherever 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 US withdrawal from JCPOA in May 2018, major banks were wary
of working in Iran.
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
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), such as the
Specially Designated Nationals list. 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
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.
In 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 were 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 —
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, including the UK’s decision to
withdraw from the EU. Negotiations between the EU and UK are ongoing —
although remotely due the Covid-19 crisis. However, as yet, there
seems to be little agreement between the two regarding what their
trading relationship 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.
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.
QAD Precision’s Restricted
Party Screening 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 QAD Precision solution is also
configurable and extensible according to a bank or financial
organization’s needs, integrating, for example, 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.
If you would like to subscribe to the QAD Precision Report, or would
like to receive notifications about QAD Precision events, webinars and
news, please click here.
About QAD Precision – Trusted Global Trade and Transportation Execution
QAD Precision, a division of QAD Inc., provides industry-leading global
trade compliance, and multi carrier transportation
execution solutions from a single, integrated platform. An
ISO-certified company, QAD Precision assists companies to streamline
and transportation operations, optimize deliveries, and increase
logistics ROI. QAD Precision’s scalable and extensible solution easily
integrates with existing ERP and WMS solutions. Industry leaders in
every region of the world rely on QAD Precision’s global support
centers to leverage thousands of carrier services and manage millions
of global trade and shipping transactions every day. For more
information about QAD Precision, visit www.qadprecision.com.