Sanctions compliance is the process of following regulations, laws, and standards to avoid doing business with sanctioned entities. The goal of sanctions compliance programs is to prevent your business from unknowingly buying, selling, or forming contracts with sanctioned individuals or entities. A sanction is a restriction placed on an individual or business. These restrictions can be put in place for a variety of reasons, such as political motivations or social injustice.
Failing to abide by sanctions laws could result in sanctions against your business, causing lost revenues, fines, and penalties. Sanctions compliance programs look to reduce the risk of engaging in transactions with sanctioned entities to safeguard profitability and avoid unnecessary fines and expenses.
Sanctions play a major role in fighting financial crime, unethical activities, and terrorism. Here are a few other reasons why sanctions rules are important.
Sanctions compliance programs build trust with customers and global partners, such as government entities. Let’s say one of your customers is the U.S. government. If the U.S. has economic sanctions in place with another country and you conduct business with that country, the U.S. government might refrain from doing future business with your company.
By showing you have the proper protocols in place to avoid transactions with sanctioned entities, you are building trust and loyalty with your existing customers.
In many areas, conducting business with sanctioned entities and individuals is illegal. For example, U.S. sanctions recently extended to the import of Russian crude oil, petroleum products, and coal. This makes it illegal for businesses operating in the U.S. to purchase these products from Russia when these trade sanctions are in place.
If your business were caught breaking these sanctions, you could face sanctions, fines, and penalties. Understanding current and changing sanctions can be done with an effective sanctions compliance program in place.
Corporate social responsibility, known as CSR, is a business model that holds companies responsible to stakeholders, employees, and the general public. One of the main components of CSR is following ethical business practices. This can be done by avoiding transactions with sanctioned entities to fight terrorism, negative environmental impacts, and social injustices.
Sanctions compliance demonstrates your company’s commitment to ethical business practices. This can result in stronger customer loyalty, new global partners, and an overall positive brand image. For example, how would the public perceive a business contract with a country or organization known for terrorism? You would probably lose more revenue from lost customers and increase your sanctions risks from regulators.
Regular sanctions violations can be costly for your business. The Office of Foreign Assets Control, known as OFAC, has different fines and penalties in place for noncompliance with sanctions. The severity and dollar amount of the penalty depends on the crime and the number of instances the crime was committed, ranging from a few thousand dollars to millions of dollars.
For example, the penalty for breaking the Trading with Enemy Act is $90,000 per violation, while the fine for violating the Narcotics Kingpin Designation Act is an average of $1.5 million per violation. Just one instance of noncompliance can cause serious financial issues for your business, which is why compliance programs are so important.
Sanctions regimes will look different for every organization depending on your risks and operations. However, there are a few components that all sanctions programs should have. Let’s go through the necessary steps to create an effective sanctions compliance program.
Before you can determine which actions are needed to create your sanctions program, you need to assess your risks. What type of sanctions risks is your business facing? What countries or entities do you conduct business with? When assessing your risks, it can be helpful to pull a vendor list to determine the country each transaction stems from.
Make a running list of countries you conduct business with. Also, outline tentative sanctions risks. The good news is that most countries have a list of sanctions in place. For example, OFAC sanctions are listed on their website.
Next, your management team needs to commit to the sanctions compliance program. The tone at the top matters. By involving seniors, owners, and executives first, the rest of your team members will understand the seriousness of the new program. In this step, your executives will also determine a budget for your sanctions compliance program.
During the commitment phase, it can be helpful to appoint a sanctions compliance officer who will oversee the development of your program and the training of your employees. Your sanctions compliance officer will be the go-to person for any issues or questions.
Now that you have your executives on board, planned a budget, and have selected a compliance officer, you will need to develop your internal controls. The goal of your internal controls is to identify, prevent, and report any prohibited transactions.
Common internal controls might include blocking a transaction with a new customer or vendor until sanctions screening takes place, requiring certain information from new customers, or setting up real-time alerts for changes in sanctions regulations.
Staff training is one of the most important steps in creating an effective sanctions compliance program. After all, your staff will be the ones processing transactions and establishing relationships with new customers and vendors. Staff should be able to identify a sanctions risk before the transaction takes place.
For example, your staff should be made aware of financial sanctions in place. When a situation does come up, your staff will fall back on their training and alert the proper team member about the issue. Remember, staff training needs to be continuous, especially as sanctions can change at a moment’s notice.
Before your sanctions program goes live, you need to test controls. Put in a fake vendor or customer, and be sure your team or software flags the transaction. If the transaction does not get flagged, it indicates issues with your controls.
When testing controls, you might find that you don’t have the right resources to identify sanctions. In this situation, take the time to find software programs and resources that help your team prevent and detect illegal activities.
The sanctions screening process identifies, assesses, and manages the potential sanctions risks in your organization. This process checks the individual, organization, or country against existing sanctions. Any sanctioned entities will be flagged, and the transactions will be prevented.
Training employees on the best sanctions screening practices is also important. Everyone on your team should know how to properly screen new entities.
Financial sanctions violations come with serious monetary implications. This makes it important to have remedial measures in place if a sanctions violation does occur. First, you need to understand why your internal controls failed. This helps you prevent future issues from occurring.
Next, you may need to alert the proper regulatory agencies about the incident. Hoping you don’t receive a fine or penalty does not take a practice approach. In many situations, regulators will be more lenient if you confess to the violation.
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