In more detail
Introduction
As the UK and other governments have placed increasing focus on preventing the circumvention of sanctions targeting Russia, and in taking enforcement action where companies fail to comply with sanctions, the roles of financial institutions in facilitating global trade and in enabling the flow of funds into capital markets have become an increasingly important focus area for authorities.
Furthermore, for banks operating in the UK, compliance challenges can be amplified by the combination of (i) the significant complexities of the UK’s sanctions regime, in particular targeting Russia, (ii) the UK’s “strict liability” civil enforcement framework for breaches of financial sanctions, (iii) mandatory requirements for banks to report sanctions-related issues to the UK’s Office of Financial Sanctions Implementation (OFSI), and (iv) the UK’s mandatory FCA and AML-related rules, which can be triggered both in circumstances of potential sanctions non-compliance, and also where there is a screening controls issue or failure (regardless of whether the bank has in fact breached any underlying sanctions). The FCA’s focus on the responsibilities of senior managers for ensuring compliance with financial crime, under the Senior Managers and Certification Regime (SMCR), will also be a relevant consideration with regard to sanctions compliance.
In this briefing, we have provided a summary of key steps that the FCA has taken to seek to ensure that financial institutions are complying effectively with financial and trade sanctions (including as discussed in the FCA’s recent Annual Report and Accounts 2022/23, published on 20 July 2023 (“Annual Report”, available here)).We have also provided a summary of key sanctions compliance risk mitigation steps for financial institutions to consider going forward.
Annual Report and Accounts 2022/23: Focus on sanctions
The Annual Report provides details of how the FCA has sought to ensure compliance with sanctions in the following ways:
- Collaboration with OFSI and other authorities: OFSI, which is part of HM Treasury, is the primary authority in the UK for ensuring that financial sanctions are effectively implemented, understood and enforced in the UK. The Annual Report confirms that the FCA works closely with OFSI in respect of the enforcement of UK financial sanctions. The FCA has also noted that it has worked with other partners “globally”, in order to enforce sanctions in response to the war in Ukraine.
- Assessment of breaches: The Annual Report notes that the FCA has “reviewed nearly 100 suspected sanctions breaches”. As discussed further below, some of the FCA’s recent enforcement cases have also involved elements of non-compliance with obligations under financial and trade sanctions.
- Supervision and proactive assessments: In addition to the assessment of suspected breaches (as outlined above), the Annual Report also notes that the FCA has “introduced a data-led approach to proactively supervise firms to ensure they have appropriate sanctions systems and controls”, and has also “conducted 38 proactive assessments looking at firms’ systems and controls”. The Annual Report notes that these reviews have involved “using synthetic data built using the Office of Financial Sanctions Implementation list of financial sanctions targets to test firms’ sanction-screening systems and deep dives into firms' systems and controls”.
Other key recent developments
In addition to the points above, there have been a range of other noteworthy developments illustrating the FCA’s role in focusing on sanctions compliance and restricting potential sanctions evasion via financial institutions. In particular:
- Economic Crime Plan 2: The UK Government published the Economic Crime Plan 2023-2026 in March 2023 (“Economic Crime Plan 2”, available here), setting out details of the UK’s approach to counter economic crime going forward. One of the core commitments made by the UK government in this document is to “[c]ombat kleptocracy and drive down sanctions evasion”, and the report notes that “to provide assurance that what firms have implemented in response to these unprecedented sanctions measures is appropriate, the FCA has strengthened its supervisory approach in assessing financial services firms’ sanction controls”. The “Actions” and “Milestones” for achieving this goal that are set out in the Economic Crime Plan 2 include to:
- “Improve engagement and information sharing of suspected breach cases between statutory supervisors including the FCA, PBS’s and OFSI to enhance UK response to breaches (FCA, OFSI)”.
- “Drive improvements in financial firms’/regulated population’s sanctions systems and controls through further development of FCA's intelligence and data led approach, to make the UK inhospitable to sanctions evasion (FCA, all supervisors)”.
- OFSI and FCA information sharing: OFSI and the FCA have previously entered into a Memorandum of Understanding, and the FCA noted in its response to the Treasury Select Committee’s enquiry into Russia sanctions in July 2022 (“Treasury Committee Response”, available here) that the FCA was “seconding an employee from our Financial Crime Department to OFSI to further develop the flow of information” between the two organisations. The FCA also noted in this document that, where issues are identified regarding sanctions non-compliance in the context of the FCA’s proactive assessments, the FCA “will liaise with OFSI and other government partners as appropriate”.
- FCA expectations regarding notifications of sanctions issues: The FCA indicated recently that it expects to also be notified where regulated firms make submissions or disclosures to OFSI in relation to (i) suspected sanctions breaches, (ii) the identification of designated persons, or (iii) asset freezes (see further details here). The FCA has also set up a dedicated reporting line in respect of sanctions evasions (see further details here), in which it notes that “[i]f you have information about sanctions evasion or weaknesses in sanction controls we want you to report it to us”.
- Focus on trade finance: The FCA has also placed an increasing focus on ensuring that banks conduct trade finance activity in compliance with sanctions and export controls. In September 2021, the FCA (together with the Prudential Regulation Authority) published a “Dear CEO” letter (available here), in which it noted that in trade finance activity “there is often insufficient focus on the identification and assessment of financial crime risk factors, such as the risk of dual-use goods or the potential for fraud”. This “Dear CEO” letter builds upon some of the themes and issues discussed in more detail in the FCA’s previous Thematic Review TR13/3, entitled “Banks’ control of financial crime risks in trade finance” (available here). The intersection between trade finance and financial sanctions also continues to be a contentious issue for market participants, as a number of recent UK court judgments in this area have illustrated.
- Overlaps with sanctions and money laundering: There has also been a significant recent focus from UK authorities on the overlaps between sanctions and AML, in particular in circumstances where sanctioned parties may be seeking to “evade” or bypass sanctions that have been imposed against them – for example by moving funds or transferring assets. In July 2022, the National Crime Agency, the National Economic Crime Centre, the Joint Money Laundering Intelligence Taskforce and OFSI all published a joint “Red Alert” entitled “Financial Sanctions Evasion Typologies: Russian Elites and Enablers” (available here). Whilst some aspects of this document are framed very broadly, it nonetheless provides a clear indication of the ways in which UK authorities consider that sanctions issues and AML can overlap.
- Enforcement action and focus on screening weaknesses: The FCA noted in the Treasury Committee Response that issues identified with firms’ sanctions compliance procedures “tend to be around the effectiveness of firms’ customer sanctions screening processes, at onboarding and on an ongoing basis, with some weaknesses also found in firms' approach to real time payment screening”. This is reflected in a number of recent FCA enforcement cases, where the FCA has identified weaknesses in AML and sanctions compliance systems and controls. The FCA also noted in the Treasury Committee Response that “the implementation of sectoral sanctions can often be challenging for firms”.
Key practical considerations
With the FCA’s focus on sanctions compliance becoming more pronounced, and as the sanctions landscape continues to evolve (including as regards introduction of new measures, regulatory guidance and enforcement outlook), we would recommend that financial institutions operating in the UK keep the following practical considerations in mind.
- Consider parallel reporting obligations: Although financial institutions may consider that reporting of sanctions issues is primarily something for OFSI, it is essential to also keep in mind the FCA’s expectations regarding the receipt of notifications of sanctions issues.
- Consider different authority expectations and priorities: OFSI and the FCA are different organisations, with different remits and different priorities from a sanctions compliance and enforcement perspective. In the context of any engagements with these authorities in relation to sanctions issues, it will be essential to tailor communications and strategy appropriately. Financial institutions may also need to engage with other authorities in a sanctions context (e.g., the UK Department for Business and Trade, in respect of trade sanctions issues).
- Consider AML implications: Where a financial institution identifies a potential sanctions issue, it is important to consider whether this may also create AML implications, in particular given the breadth and complexity of the UK’s AML regime, including under the Proceeds of Crime Act 2002.
- Review sanctions compliance policies and procedures (including screening procedures): Given the FCA’s focus on the effectiveness of a bank’s financial crime systems and controls, we would recommend that FCA-regulated institutions re-review their sanctions compliance policies and procedures – in particular to consider whether any updates are necessary to reflect the complex sanctions targeting Russia.
- Consider implementation of sectoral sanctions: Given the complexity of the UK’s sectoral sanctions measures targeting Russia, it is essential for banks to have appropriate systems and controls that seek to manage these risks. These measures require a different set of compliance tools to ensure compliance.
