Sanctions

Managing sanctions risk

David Potts considers the limitations that sanctions place on accountants operating in the UK and Republic of Ireland, how to apply appropriate due diligence and how to mitigate your sanctions risk.

Russia’s invasion of Ukraine in February 2022 and the subsequent response of countries and international organisations around the world has brought a new focus on financial sanctions and due diligence for accountants operating in the United Kingdom and Republic of Ireland.

Sanctions are restrictive measures imposed on individuals or entities to curtail their activities and exert pressure and influence on them. Measures include, but are not limited to, financial sanctions, trade sanctions, restrictions on travel and civil aviation restrictions. Sanctions can be put in place to fulfil a range of purposes, including complying with UN and other international obligations, supporting foreign policy and national security objectives, maintaining international peace and security, and preventing terrorism.

However, sanctions are not an innovation and there are no new additional requirements for accountants to take consideration of when onboarding potential clients or servicing an ongoing relationship. The size, scale and interest in sanctions regimes may have grown, but the obligations for regulated accountancy firms remain the same.

Sanctions frameworks

The UK implements a range of sanctions regimes through regulations made under the Sanctions and Anti-Money Laundering Act 2018 (also known as the Sanctions Act). The Sanctions Act provides the main legal basis for the UK to impose, update and lift sanctions.

Some sanctions measures (such as asset freezes and travel bans) apply only to persons or ships which have been designated or specified by the UK government. This is publicised through the UK sanctions list, which contains designations or specifications made using legislation under the Sanctions Act.

The Office of Financial Sanctions Implementation in HM Treasury also maintains a Consolidated List of Asset Freeze Targets, which contains details of designations specifically for financial sanctions, where asset freeze measures apply.

The Republic of Ireland does not impose any unilateral sanctions regimes, but implements UN and EU sanctions, published within consolidated sanctions lists. Within the EU, each member state is required to designate competent authorities that are engaged with sanctions issues. In Ireland, the three competent authorities are: the Department of Foreign Affairs; the Department of Enterprise, Trade and Employment; and the Central Bank of Ireland. Given the multi-sectoral nature of sanctions measures, a wide range of government stakeholders are also engaged with sanctionsrelated issues.

Anti-money laundering requirements

A firm offering accountancy services must carry out and apply customer due diligence when establishing a business relationship and throughout an ongoing business relationship.

Regulation 33 (6)(c)(iii) of the UK Money Laundering Regulations 2017 requires that when assessing whether there is a high risk of money laundering or terrorist financing in a particular situation, and the extent of measures which should be taken to manage and mitigate that risk, you take account of risk factors including countries subject to sanctions, embargoes or similar measures.

Similarly, the Republic of Ireland Criminal Justice (Money Laundering and Terrorist Financing) Act s 39 lists countries subject to sanctions, embargoes or similar measures issued by organisations such as the UN or EU as factors suggesting potentially higher money laundering risk.

Webinar recording: Understanding politically exposed persons and sanctions risk

This informative webinar looks at practical approaches to efficiently implement a risk-based approach for better identification and monitoring of politically exposed persons and sanctions risk. The focus of the webinar is:

● developing and enhancing your money laundering and terrorist financing risk assessment to meet regulatory expectations;

● providing you with an ability to identify gaps or opportunities for improvement in anti-money laundering policies, procedures and processes;

● ensuring that firms are aware of key risks, control gaps and remediation efforts;

● establishing source of funds and wealth of current and prospective clients;

● assessing whether clients are classified as politically exposed persons and how this alters the business relationship; and

● firm responsibilities relating to sanctions.

This webinar will help supervised firms to ensure that they maintain client due diligence policies and procedures which meet regulatory requirements and best practice, appropriate and proportionate for their size and activities.

www.aiaworldwide.com/my-aia/aml/ peps-and-sanctions-risk/

Appropriate due diligence

In addition to anti-money laundering controls, a firm needs to be able to ensure that it is not doing business that is connected to individuals, entities or countries subject to sanctions.

To ensure a robust sanctions compliance control framework, firms must understand the products and services they offer, identify areas where they may be vulnerable to sanctions breaches, and put controls in place to mitigate these sanctions risks. Therefore, it is key to establish the source of wealth and source of funds of clients.

The risk of an entity or individual being present on a consolidated list is often aggravated when they are a politically exposed person, a high net worth individual or are resident in, or operating in, a high-risk jurisdiction. If a firm is undertaking trust or company services, the risk is also heightened.

Sanctions themselves bring a new risk of displacement of funds and assets as sanctioned individuals and entities seek to disassociate themselves from wealth and property yet maintain control over it, such as by transferring ownership to a trusted associate or family member not presently on a consolidated list.

Top tips: how can I be compliant and manage my risk?

● Consider discussing with clients their supply chains and exposure to sanctioned entities.

● Review your firm-wide risk assessment and check your risk appetite.

● Sanctions guidance is often changing. For further information, frequently check: www.aiaworldwide.com/insights/aml/financialsanctions-measures-russia

● Subscribe to e-alerts from HM Treasury and Office of Financial Sanctions Implementation.

The risks of acting for a sanctioned individual or entity

There are a number of risks associated with acting for a sanctioned individual or entity:

● Monetary penalties: In the UK, the Office of Financial Sanctions Implementation may impose monetary penalties if a person has breached a prohibition or failed to comply with an obligation imposed under financial sanctions legislation. In usual cases, this penalty could be £1,000,000, alongside sentencing for criminal prosecutions of up to seven years. The penalties in Irish law for a breach of EU financial sanctions are contained in a statutory instrument signed by the Minister for Finance.

● Disciplinary proceedings: Failing to comply with the regulations in force could mean you lose your AIA Practising Certificate and face disciplinary proceedings if you are judged to be non-compliant during a monitoring review.

● Reputational risk: Outcomes of the above penalties are available in the public domain and accessible for potential clients determining accountants to hire.

● Assisting bad actors evade sanctions: Fundamentally, acting for sanctioned individuals or entities undermines the sanctions regime and assists those seeking to evade these restrictions.

Mitigating sanctions risk

To help protect your firm from conducting business with sanctioned entities or individuals, a robust sanctions compliance programme is vital, including national and international screening and monitoring. Furthermore, because the global sanctions landscape is always changing, you must make sure that your controls and processes are agile enough to react appropriately.

To ensure compliance with sanctions regimes, there are some best practices firms may follow:

● senior management (where applicable) should understand and endorse your firm’s sanctions obligations and policies;

● prepare and update your firm’s policies and procedures;

● communicate these policies and procedures to staff and third parties;

● provide regular training to ensure that staff and third parties understand the requirements;

● ensure the firm’s screening process covers the nature, size and risk of its business;

● ensure that procedures provide escalation contacts for sanctions enquiries (where applicable) and to report violations; and

● regularly review the sanctions compliance programme, including policies, procedures, training and screening.

Checking whether your client is a sanctioned individual or entity

Your client onboarding and ongoing business relationships should involve conducting searches through global, government and regulatory databases to identify entities that are restricted from participating in certain activities or industries. These searches can be undertaken manually, searching published lists, or electronically if you use client onboarding software. In this instance, you should check that your software or third-party solution is using updated sanctions lists as these are subject to change.

If there is no automatic flagging system, you must ensure that you continue to run checks as part of your ongoing customer due diligence, particularly where ownership of a business changes or the jurisdictions in which your client operates changes. If you have many clients, you should determine how resource intensive conducting ongoing monitoring may be and consider the use of client management software which addresses verification and monitoring using a risk-based approach.

You should also ensure that you have an up to date firm-wide risk assessment, taking note of the guidance AIA provides. This can be used to assess whether you are comfortable taking clients on who are high net worth individuals, operate in high-risk jurisdictions or who request company formation services. Has your risk appetite and firm-wide risk assessment changed since additional focus has been placed on sanctions?

When conducting due diligence, it is also vital to maintain records which evidence the checks you have undertaken. These can be excerpts from company registers, copies of verified identifications or company structures. You must make sure you verify the identity of all beneficial owners of the company. Where a company is owned by another entity, you must make every endeavour to identify the human owner.

You may consider that your clients are not involved in sanctions regimes or individuals, but can you prove it? Have you addressed any supply chain issues which could mean that your clients have exposure? Have you had this discussion with them? Do you know your clients enough to consider whether this is useful to understand?

Key points to remember

● Sanctions exist and they can have a big impact on you and your business. Breaching financial sanctions is a criminal offence and can result in a civil monetary penalty being imposed on your business or you, with imprisonment of up to seven years.

● It is your responsibility to check whether individuals, organisations or countries that you are dealing with are impacted by sanctions. You are expected to undertake due diligence so that you know who you are dealing with, both directly and indirectly; for example, looking at ownership and control of an organisation.

● You may need a licence. In certain circumstances, the government may grant a license to permit an activity that would otherwise be prohibited. It is up to the licensing authority to determine whether a licensing application is in line with the purposes.

● You must report any suspected or actual breaches of financial sanctions to the Office of Financial Sanctions Implementation (UK) or the Department for Foreign Affairs (Republic of Ireland). If you believe that you are dealing with an individual or organisation that is or was subject to sanctions at the time of the activity, you must free their funds and assets immediately, report this, not deal with or make funds or economic resources available to them and not do anything that would circumvent the asset freeze.

AIA Supervisory Expectations

The recent imposition of further sanctions on Russia and named individuals and entities has increased the potential risk of money laundering as individuals and business may seek to evade these respective sanctions regimes.

Recent developments in Russia and Ukraine may also impact on the classification of new and existing clients and cause them to fall within the definition of politically exposed persons.

Members in practice are reminded of their obligation under the UK Money Laundering Regulations 2017 and the Republic of Ireland Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 (as amended) respectively, to conduct risk assessments and to perform enhanced due diligence checks where required. In particular, members should ensure that they fully understand the source of funds and wealth in relation to their clients identified as high risk.

Since many of those who are subject to sanctions may also be politically exposed persons, members are reminded of their obligation to ensure that they have adequate and up to date procedures in place to identify whether a client, or the beneficial owner of a client is a politically exposed person, or is a family member or known close associate of a politically exposed person.

Whether in practice or in business, AIA members must comply fully with their legal and professional obligations relating to the sanctions regimes in their respective jurisdictions. AIA expects that they will be willing to play their part in helping companies across the economy to cope with any consequent disruptions.

Other sources of guidance

● Office of Financial Sanctions Implementation: bit.ly/3llgu5T

● Foreign, Commonwealth and Development Office consolidated lists: bit.ly/3Lp6xz3

● Republic of Ireland, Department of Foreign Affairs: bit.ly/3NgM6FC

● EU consolidated lists: bit.ly/38tdYrH

Firms should be aware that these sanctions are subject to change and should maintain up to date screening processes.

Information correct as of 16 May 2022.