Financial institutions must abide by a complex web of
international trade compliance and anti-money laundering
regulations. In this QAD Precision Report we look at the challenges
of compliance for banks.
Financial institutions and banks must deal with some unique and
complicated global trade compliance requirements. This is a
requirement set by international and national organizations, such as
the European Union and the US Federal government. These bodies are
deeply concerned about ensuring money that crosses international
borders – through financial transactions, shipment of funds, and so
forth – is not being used to support criminal activity, terrorism, the
spread of nuclear weapons and other such activities.
In response, government organizations have adopted a complex web of
rules. Trade regulations, export controls, embargoes and sanctions
come into play in international transactions. Some of the most
critical trade compliance challenges facing the financial industry
include OFAC regulations, global trade compliance and licensing requirements.
Any institution that uses US currency must comply with OFAC rules.
OFAC is the US Treasury’s Office of Foreign Assets Control.
As the US dollar is the most popular global currency, OFAC has
significant reach. This is true for enterprises based outside the US.
Any organization that makes or accepts transactions in US dollars is
subject to OFAC regulations.
OFAC is the organization responsible for enforcing compliance with
trade sanctions against targeted foreign governments. Furthermore, it
also places controls on shipments and transactions between individuals
and governments, and can freeze assets under US jurisdiction.
The list of OFAC sanctioned persons, countries and entities is long.
Sanctions and restrictions can be applied to business entities and
individuals with ties to narcotics trafficking and terrorist
organizations. In addition, they are applied to certain countries such
as Cuba, Iran, Libya, North Korea, Sudan, Syria and others.
Transnational criminal organizations and business entities known to be
associated with them, such as mafia-type organizations and
cyber-hacking collectives, are also targeted for OFAC sanctions.
In addition, OFAC is also the office that oversees compliance with UN
and other allied international mandates. It cooperates closely with
international authorities and allied governments. As a result, OFAC
compliance is a challenge for international financial institutions.
These regulations are multilateral and complex as well as subject to
change at short notice.
The US and UN aren’t the only entities whose regulations are of
concern to banking organizations. Each individual nation has its own
trade regulations and policies to combat financial crime. For banks
that do business internationally, these create a very complex web that
can make financial industry logistics particularly challenging.
In addition to sanctions, anti money laundering laws aim to combat
terrorism financing, financial fraud and other criminal activities.
Under US law, banks must identify and assess the money laundering risk
presented by their customers, products and services. Banks must also
examine whether their activities, products and delivery channels could
be exploited by criminals or terrorists.
Furthermore, US banks that engage in business with legal entities
must also identify the people who own or control them. This is to
combat the use of offshore accounts, trusts and shell companies to
hide funds, evade taxes and launder money.
The European Union has similar laws to prevent terrorists or
criminals exploiting the EU financial system. Banks in the EU must
perform customer due diligence to identify and verify who their
customers are. Like US regulations, this includes identifying
individuals who have ownership or control over legal entities.
Financial institutions must also comply with Financial Action Task
Force (FATF) guidelines, in the territories where they apply. FATF is
the international standard setting body tasked with combating money
laundering and terrorist financing. The body has a series of
“Recommendations” that member countries must endorse, support and work
to legislate. Thirty-seven countries and two regional bodies — the
European Commission and the Gulf Cooperation Council — are members.
When a nation is under sanctions, it isn’t the case that it’s
entirely illegal to conduct business there. However, for banks and
financial services firms to do business in targeted countries, or with
targeted individuals, licensing is often required. It can be
challenging to manage these licensing requirements. They, too, can be
subject to change on short notice as the political or trading
Trade compliance is a major issue for banks. Missteps result in heavy
financial penalties and reputational damage.
To mitigate the risk of violations, banks need robust compliance and
screening procedures. Manually checking customers and transactions
against government and international lists of restricted and
sanctioned parties is almost impossible. Regulatory compliance is not
optional, no matter how complex. However, technology solutions can
assist banks to meet this challenge.
compliance software helps compliance teams to monitor changes to
regulations and published lists of restricted individuals and
entities. Automated compliance software can also assist banks to
ensure that licensing requirements have been met.
party screeningsoftware can automatically check names
against published lists of denied or sanctioned individuals and
groups. As these lists change frequently, banks need providers that
offer daily updates to trade content.
In addition, by leveraging this technology banks also have a
permanent audit trail of compliance checks and results for each
transaction. This provides the required without disrupting business.
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