Embargoes Sanctions Simplicities Complexities on Financial Institutions

1. 6/11/2012 Bashir Al-Nakib 1 Embargoes & Sanctions Simplicities & Complexities on Financial Institutions

2. 6/11/2012 Bashir Al-Nakib 2 What are sanctions: Definition: Sanctions are punitive or coercive measures against a state or its nationals failing to comply with. Types of sanctions: All UN member states, are obliged to implement UN Security Council sanctions domestically. Financial Institutions must comply with sanctions in all jurisdictions within which they operate.

3. 6/11/2012 Bashir Al-Nakib 3 Current Sanctions – some examples Multilateral Sanctions: UN sanctions include Iran, Afghanistan, Taliban, Al Qaida, Ivory Coast, Congo, Liberia, North Korea, Lebanon, Liberia, Sudan; EU sanctions against Myanmar (Formerly Burma). Bilateral sanctions: US sanctions against Cuba; Australia recently announced “bilateral smart sanctions” against Robert Mugabe’s government in Zimbabwe. Sanctions can be targeted; for example, there are currently UN sanctions against the following activities with Liberia and Congo: Specific arms trading and military assistance Importing rough diamonds Sanctions against persons included in UN lists.

4. 6/11/2012 Bashir Al-Nakib 4 Fines and penalties Non-compliance with sanctions can result in significant fines, penalties and reputation risk: UBS fined USD100m in 2004 for sending USD to Cuba, Iran, Libya and Yugoslavia. Riggs Bank fined USD25m in 2004 for failing to monitor suspicious financial transactions. Arab Bank fined USD.10 m in 2004 for lack of training system & USD.25 m in 2005 for failing to monitor cover payments and suspicious transaction ABN Amro fined USD80m in 2005 for illegal money laundering practices.

5. 6/11/2012 Bashir Al-Nakib 5 Main issues for banks Ensure that sanctioned countries and names are not included in any transactions or payments. International payments can be broadly defined as being of two types: “Documentary payments” are traditional trade transactions supported by letter of credit and supplementary documents (bills of lading, invoices, certifications, insurance etc). “Clean payments” are bank to bank payments under instruction but not supported by trade documentation. Payments are generally via SWIFT MT103 messaging by overseas draft. Banks must block sanctioned payments and report them to the regulator. Most transactions involve US “assets” or “persons” so must comply with US sanctions.

6. 6/11/2012 Bashir Al-Nakib 6 Managing Sanctions Off-the-shelf shelf filtering software is available Can check incoming and outgoing payments and any other transaction or customer information entered onto systems. However, judgment is required: Names may not be a complete match May get a country match but the transaction is not sanctioned. Must have a process for assessing and then declining or approving transactions with full audit trail. Staff must have targeted training depending upon factors such as: Nationality Type of business (eg domestic, global trade, international payments etc) Decision making capacity.

7. 6/11/2012 Bashir Al-Nakib 7 Factors to Consider (1) Process for maintaining and communicating changes to sanctions Potential “white list” of safe names Must ensure all transactions are captured The checks required for documentary payments Whether there an obligation to understand the drivers behind all transactions, even if we have no credit exposure Whether transactions below a thresh-hold can be processed without a name check

8. 6/11/2012 Bashir Al-Nakib 8 Factors to Consider (2) Frequency for reviewing customer and transaction details. Level of delegations to apply to approval process. Maintenance of sanctions policy and process. Incorporation of sanctions management into new products and change programs. Ensuring the right training is delivered on a ongoing basis Ensuring that managing AML, CTF and ETS is included in performance reviews.

9. 6/11/2012 Bashir Al-Nakib 9 Factors to Consider (3) US sanctions particularly difficult because: US sanctions are tougher than EU and UN sanctions Most transactions involve US assets or persons US penalties are high.

10. 6/11/2012 Bashir Al-Nakib 10 STAKES AND RISKS The involvement of a financial institution in fighting money laundering or terrorism financing network exposes that institution to a number of different kinds of risks: Reputational risk: the institution involved may find its image damaged significantly and it may sustain significant and lasting negative business impacts Legal risk: the discovery of money laundering operations may lead to disciplinary sanctions Criminal liability risk: for senior management personnel and staff

11. 6/11/2012 Bashir Al-Nakib 11 MLFT OBJECTIVES Select customers in a way that denies access to the services of the Bank to individuals and legal entities associated with money laundering or the financing of terrorism Monitor operations to prevent the use of financial institutions for illegal operations If necessary, in the event of suspicious activities: Report suspicions to the responsible authorities Freeze assets (terrorism and embargos) Terminate business relations

12. 6/11/2012 Bashir Al-Nakib 12 Watch list Filtering Scanning of customer records & transactions against Government sanction lists – OFAC, BOE, UNO etc High risk individuals- terrorists, organized crime, fraudsters etc Exposed individuals – PEPs, public figures, high profile 3rd party database providers – WorldCheck, Thomson, Bridger, WorldCompliance, etc Key Issues Character Variations Phonetic Variations Transliterations & cultural differences Using intelligent name matching algorithms with : Normalization of names – capitals, abbreviations, spaces, punctuation Reference libraries – common short names, cultural inputs Reduction to simplified representation – phonetics, soundex Indexing – decision tree Similarity assessment – string equality, sub-sets, edit distance

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14. 6/11/2012 Bashir Al-Nakib 14 Filtering Example

15. 6/11/2012 Bashir Al-Nakib 15 Filtering Black-Listed /Sanctioned Entities-Names

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17. 6/11/2012 Bashir Al-Nakib 17 Impacts of Global Sanctions Increased cost of compliance Potential cost of non-compliance (ie breaching a sanction and getting caught) Reputation risk Fines and penalties Use of U turn by increasing payments in EUR and other non-USD currencies so as to avoid having to meet US regulatory requirements Increased decline in documentary payments, and finally … Do sanctions work – do they influence the behaviour of sanctioned entities and persons?

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