Firms warned on sanctions compliance complacency

Financial institutions must ensure they do not succumb to complacency towards sanctions compliance, particularly with Iran and Russia.

It is expected EU and US sanctions towards Iran will be eased, and a number of fund managers and banks have been exploring the sizeable Iranian market. The Tehran Stock Exchange boasts a market capitalization of nearly $120 billion and could prove to be quite lucrative and diverse. However, Iran has been cut off from SWIFT and broader capital markets since 2012.

“Some financial institutions, such as fund managers, are exploring the Iranian market and there is nothing wrong with that. However, it is crucial those individuals are careful about what they agree informally or formally when in Iran, especially during the current period ahead of the anticipated easing of sanctions. In-house legal counsel are generally sensitive to sanctions compliance and firms should be careful not do anything that could be in breach of US or EU sanctions,” said Roger Matthews, senior director at Dechert, an international law firm.

EU sanctions are less restrictive than US sanctions against Iran. US sanctions apply to US persons, which in itself is quite a broad definition. The Iran sanctions also apply to non-US subsidiaries of US corporates. Furthermore, non-US persons are prohibited from carrying out any financial transactions in Iran using US Dollars. “There are a handful of asset managers looking closely at Iran, and it is essential they adopt the appropriate legal structures when transacting in Iran,” commented Matthews.

Russian sanctions also present challenges for financial institutions as many will have exposure to the region or a physical presence in the country. The US Treasury Department’s Office of Foreign Asset Control (OFAC) and EU have adopted a relatively pragmatic approach towards Russian sanctions insofar as it bans any US person from trading new debt or equity issued by a handful of Russian financial institutions and corporates. Pre-existing debt and equity holdings in sanctioned companies are allowed to be traded.

Nonetheless, there are complexities in regards to sanctioned persons. Financial institutions must undertake in-depth know-you-client (KYC) checks prior to opening up accounts on behalf of Russian entities, partly because a number of corporate structures in Russia are quite complex. It is crucial firms identify the ultimate beneficial owners.

Matthews said the degree to which financial institutions were reviewing Russian beneficial owners varied on a case-by-case basis. However, he added it was essential that, at a minimum, financial institutions looked at World Check, the Thomson Reuters risk management tool containing details and information on blacklisted persons, or a similar screening tool, before on-boarding new business in Russia.

The penalties for breaching sanctions are non-trivial, particularly in the US. BNP Paribas was hit with an $8.9 billion fine after it processed transactions in sanctioned countries including Iran, The Sudan and Cuba. HSBC, ING, Credit Suisse, Barclays and Standard Chartered have also been subject to fines for sanctions breaches.

The UK could also up the ante on sanctions compliance. The UK’s Office of Financial Sanctions Implementation is due to be established in early 2016 and this could herald some enforcement actions.