Given the exceptional scale and speed with which sanctions were implemented against Russia by the UK Government, the FCA and the Office of Financial Sanctions Implementation (OFSI) were expected initially to show some forbearance as firms reacted to the UK’s new sanctions environment.
The FCA has indicated that this period of forbearance may now be over. In a letter to the Treasury Select Committee inquiry on “Russia: Effective Economic Sanctions”, the FCA stated that, having given firms a reasonable period to respond, it has now increased its assessment work on sanctions controls, with a particular focus on sanctions breaches and attempts to circumvent sanctions.
New FCA sanctions supervision and enforcement program
The FCA has started a program of sanctions controls assessments, including on-site reviews. In addition, the FCA has developed a new assessment tool, to deploy as part of its assessment of selected firms, which instructs those firms to screen an extensive list of entities to test the effectiveness of firms’ sanctions screening. The use of this tool has the potential to enable the FCA to conduct targeted sanctions assessments over a much greater number of firms than could be covered by supervision visits and reflects the FCA’s increasing use of data analytics as part of supervision.
Whilst a breach of financial sanctions by a firm may lead to enforcement action by OFSI, breaches may also indicate to the FCA a material weakness in a firm’s financial crime systems and controls, for which the FCA may consider taking separate enforcement action.
The FCA has already indicated that it expects to be notified by firms of submissions firms make to OFSI, in accordance with their legal obligations, regarding: suspected sanctions breaches, the identification of designated persons with which firms are dealing or that firms have identified they are holding asset subject to an asset freeze. Firms should also consider their Principle 11 obligations to inform the FCA of matters of which it would reasonably expect notice. In addition to this, the FCA is encouraging whistle-blowers to report sanctions breaches and sanctions control weaknesses directly to its whistleblowing team.
The FCA and OFSI are committed to sharing information between them, including through formal information exchange mechanisms and the seconding of financial crime experts from the FCA to OFSI. Firms should therefore expect the FCA to seek to understand details of potential sanctions breaches and be prepared for the potential for parallel investigations by the FCA and OFSI.
Effective sanctions screening is a key priority
The FCA has warned that a key potential weakness in firms’ sanctions compliance concerns onboarding and ongoing screening processes, as well as the effectiveness of real time payment screening. In addition, complying with sectoral sanctions was identified as an area which can pose real challenges for firms.
The FCA reported that during 2019-2020, over 25% of firms responding to its Financial Crime Data Return reported using a manual sanctions screening process. Whilst firms are not prohibited from operating a manual process, the FCA has warned firms to consider whether this remains appropriate given the current Russia-related sanctions regime.
Even where using automated screening processes, it is important for firms to understand how such screening tools work and to ensure automated tools are properly calibrated and subject to effective oversight and governance, with unexpectedly low hits investigated. It is easy to see how the FCA could use its experience in investigating and enforcing in respect of AML systems and controls in the context of sanctions screening processes.
Financial institutions are on the front line of sanctions compliance and where sanctions breaches are identified by customers, firms should be prepared for questions by regulators and law enforcement agencies around how their systems and controls enabled prohibited transactions to take place.