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International sanctions and terrorist financing risks multi-effect of higher concern in conducting cross-border financial operations. In English

K. Anufriieva

Economy and Forecasting, 2016, issue 3, 137-147

Abstract: The article deals with the general view on international sanctions as a part of policies integrated into the overall compliance process, regulating and protecting global financial system from money laundering, from being used for terrorist financing. Sanctions may restrict financial operations with the designated sanction targets: countries, political regimes, entities, persons, sectors of economy, maritime vehicles, certain goods and services, also with regard to the type of financial transaction itself being permitted or prohibited; sanctions are of collective and particular effect; operation-, goods or services-, activity- and party-based; sanctions are expressed in certain actions, including asset freeze, termination of operation and embargo. It is outlined that the "financial" side of sanctions refers to assets freeze and making no funds or economic resources available to a designated person. The author defines the main bodies acting on the international arena: the United Nations Security Council adopting sanctions measures to encompass a broad range of enforcement options that do not involve the use of armed force, to range from comprehensive economic and trade sanctions; the European Union imposing sanctions either on an autonomous EU basis or implementing binding Resolutions of the Security Council of the United Nations comprising specific or general trade restrictions, financial restrictions; the U.S. Office of Foreign Assets Control ("OFAC") of the US Department of the Treasury enforcing economic and trade sanctions using blocking of assets and trade restrictions, publishing lists of targeted persons. The author emphasizes that the great stimulus to strictly adhere to sanctions is the size of asset freezes and fines imposed i.a. on financial institutions, not merely for rude violations, but also for sanctions' misinterpretation. According to the empirical experience, the author agrees that the sanctions' application practices condition a reshape of banking business models around the world leading to so-called de-risking, embracing reduction of international settlements, documentary business and termination or restricting of business relationships. The de-risking process is aimed to be regulated by the comprehensive risk-based approach requiring assessment of money laundering and terrorist financing risks and taking the appropriate enhanced or simplified mitigation measures. With consideration of the de-risking process, correspondent banking relations once being the core acknowledged channel for facilitation of cross-country partnership and global movement of funds are more often assigned a high risk mainly for fear of non-compliance of respondent banks and increasing cost of regulatory compliance. To help conduct assessment instead of total termination of relations, the author has selected a number of world-practiced factors that financial institution should consider with regard to a partner bank, e.g. jurisdiction; information on ownership, major business activities, target markets, quality of banking regulation and supervision, details on originator and beneficiary in payment messages. The author notes that there are licensing policies with respect to the otherwise prohibited transactions subject to an authorization on a case-by-case basis or general basis under certain terms (e.g. under the American law, exports to Iran of agricultural commodities (including food), medicine and medical supplies is possible under certain conditions, whereas other supplies remain prohibited). Next, the article sheds light on the issues to consider when checking a transaction or parties to the transaction against sanctions lists: country risk; the exact sanctions' target, comparison with the designated lists of countries, economic sectors, persons, goods or services, or the transaction itself, considering source of funds and ambiguous nature of sanctions. The author tries to integrate the multi-directional and multi-level compliance process of a single institution and define the place of compliance with sanctions regulations. The indicated process is based on legislative and internal regulations, includes due diligence on different stages of cooperation with a customer (including with a customer financial institution). The due diligence may be enhanced to the so called Know Your Customer's Customer policies in order to learn not only about its direct customers, but also about all intermediaries and ultimate ordering or beneficiary parties to a transaction to detect any direct or indirect exposures to entities or individuals subject to international sanctions. The author agrees that there is a dilemma in treating documentary instruments, as because of possible application of sanctions and related reputation risks, of particular concern are the commitments (including payments) under documentary instruments. The author concludes that the current trends oblige financial institutions to promote a pro-active approach in the assessment of existing relationships and continuous monitoring of their direct and indirect exposures, to focus on compliance, which includes adherence to sanctions regulations, in order to ensure prior check and the following monitoring of an operation to avoid reputation risk.

Date: 2016
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