3 minute read
NACFB: Closing the net
Closing the net
Why brokers are advised to update screening procedures
James Hinch Head of Compliance NACFB
Part of the UK governmentʼs response to the Russian invasion of Ukraine has been to coordinate with partners on sanctions aimed at starving the Russian government of funds. As well as upholding existing measures, wide-ranging new sanctions have been introduced on Russian businesses, banks, and individuals.
Sanctions and embargoes are restrictions applied by a government or other body against a country, entity or individual. They may be imposed for a variety of political, financial, economic, social, or military reasons. In the case of Russia, all these may currently apply.
For commercial finance brokers, the Russian war against Ukraine highlights the importance of implementing sanctions checks on new and existing clients and ensuring that they are an integral part of the Know Your Customer (KYC) and Anti-Money Laundering (AML) due diligence processes.
Breaching any embargo or sanction is a criminal offence which is punishable by heavy fines for individuals and companies, or even, for the individual, imprisonment. As such, sanctions searches are seen by many as an essential element of good governance for firms in the financial services industry, including brokers.
However, from our regular Minimum Standards Reviews (MSRs) with NACFB Members, we know that some brokers do not perform sanctions checks on clients as part of their KYC and AML due diligence processes – and they are not actually obliged to do so. Either the broker deems it unnecessary, or they consider that the responsibility lies with the lender.
Deciding whether to carry out sanctions checking depends on a broker’s appetite for risk. If the checks are left to the lender and they go on to discover that a client is subject to sanctions, this could damage the broker’s reputation. It could also lead to the lender choosing not to transact with the broker in future.
From an NACFB perspective, sanctions checking demonstrates best practice. They can also help to speed up an application, although the lender will always carry out their own checks too. Brokers should also be mindful of the conditions in any lender-broker agreement, as some lenders require that brokers undertake sanctions checks to introduce business.
We recommend that Members conduct their due diligence on clients, including screening for sanctions and PEPs (Politically Exposed Persons), prior to any formal engagement with a lender. Screening for sanctions should be carried out against the current UK Financial Sanctions List published by HM Treasury. Remember, Members have access to this list via Red Flag Alert as well as other business intelligence, including PEPs and UBO (Ultimate Beneficial Owner) checks, alongside Companies House documentation.
For existing clients, it is up to the broker to decide how often sanctions checks should be performed but regardless of whether a client is new or longstanding, brokers must keep accurate records. Members who use the NACFB’s template documents to steer their policies, processes and procedures will know that guidance is provided on when to perform the checks and on record keeping.
Having carried out the checks, should a broker discover that the client is subject to sanctions, they should decline to transact with the client and, if appropriate, inform the lender.
Next steps
With UK, EU, and US sanctions set to intensify, now may be a good time for NACFB Members to brush up on the latest in embargoes and sanctions regulation via the Association’s exclusive online training platform which boasts several relevant courses including ‘Embargoes and Sanctions’, ‘Economic Sanctions’, and ‘Money Laundering and Terrorist Financing Risks of Virtual Assets’. These courses, alongside dozens of others, can be found in the ‘Essentials Training’ folder.
The ‘Embargoes and Sanctions’ module takes about an hour to complete and includes a short assessment at the end. The course helps brokers to identify the steps and actions to take to comply with the rules and explains how to report matches and suspect transactions. All courses can be found under the CPD tab of your NACFB account.
Members who do not use the NACFB’s template documents to help steer their business policies, processes, procedures, and practices, may wish to use them as a benchmarking tool to assess whether their own systems comply with the current regulations. When reviewing AML and KYC due diligence processes, we recommend paying extra regard to our Anti-Money Laundering Policy and Compliance Plan.
The documents – and there are currently more than 70 – can be accessed by logging into your NACFB account. They are available in Word format so that Members can add their business details and edit fonts and layout to fit their brand.
