Watch list screening tools, and protocols have recently received close attention from regulators, and as seen US violations of sanctions, laws are enforced very strictly.
Therefore the role and importance of strong sanctions controls cannot be underestimated and considerations of issues such as those shown below should be considered.
- software an control failure (see below),
- 50% rule (see below),
- AKAs – aliases (see case below),
Also
- overlapping lists,
- sectorial sanctions,
- partially eased Iran and Cuba programs.
Example case National Bank of Pakistan
In 2015, the National Bank of Pakistan paid the penalty to US Treasury for mistakenly processing prohibited transactions due to a software failure.
National Bank of Pakistan case ups the ante
In June 2015, the National Bank of Pakistan paid a $28,800 penalty to US Treasury for apparent violations of US sanctions programs.
In this case, the prohibited transactions were mistakenly processed due to a software failure. Violations of sanctions laws were enforced so strictly that the institution was punished anyway.
The US Treasury Department’s Office of Foreign Assets Control (OFAC) stated that the New York branch of the bank processed wire transfers totalling $55,952 for the sanctioned Kyrgyzstan airline, Kyrgyz Trans Avia.
OFAC blacklisted Kyrgyz Trans Avia in 2013 after authorities had alleged the airline helped Iran acquire aircraft which may have been used to deliver weapons for the war in Syria.
The bank’s sanction screening tool failed to detect the name of the account name “LC AIR COMPANY KYRGYZTRANSAVIA” as belonging to KYRGYZ TRANS AVIA ACCOUNT, OFAC said.
Two health insurance policies not screened
OFAC found that AXA Equitable Life Insurance Company (AXA) facilitated and/or processed payments and maintained two health insurance policies in which SDNs had an interest. When AXA issued the policies in 1992, the policy holders were not on the SDN List.
The Kanawha Insurance Company (whose parent company is Humana, Inc.), as TPA, serviced the policies, collected premiums, maintained policy records, and answered general inquiries from insured parties.
In 2009, OFAC added the policy holders to the SDN List. Neither AXA nor Kanawha screened the names of the policyholders serviced by the TPA, and both companies failed to identify and block the policies and premium payments.
In 2011, a new company assumed TPA responsibilities, identified the policyholders as SDNs, and coordinated with AXA to block and cease providing any services for the policies.
OFAC found that Findings of Violation should be issued because:
- The companies are large and commercially sophisticated financial institutions.
- The companies facilitated and/or processed numerous payments, and maintained two health insurance policies in which one or more SDNs had an interest, doing harm to the U.S. sanctions programs.
- The companies’ compliance programs did not ensure that the names of policyholders associated with policies were screened or reviewed for OFAC compliance purposes.
OFAC Fifty Percent Rule [JUNE, 2016]
Entities that a person on the OFAC SDN List owns (defined as a direct or indirect ownership interest of 50% or more) are also blocked, regardless of whether that entity is separately named on the SDN List.
In August 2013, OFAC issued revised guidance “Revised guidance on entities owned by persons whose property and interest are blocked” (see:https://www.treasury.gov/resource-center/sanctions/Documents/licensing_guidance.pdf)
This guidance says that the property and interests in property of entities directly or indirectly owned 50 percent or more in the aggregate by one or more blocked persons are considered blocked regardless of whether such entities appear on OFAC’s Specially Designated Nationals and Blocked Persons List (SDN List) or the annex to an Executive order.
The revised guidance expands upon the earlier guidance by setting forth a new interpretation addressing entities owned 50 percent or more in the aggregate by more than one blocked person. U.S. persons are advised to act with caution when considering a transaction with a non-blocked entity in which one or more blocked persons has a significant ownership interest that is less than 50 percent or which one or more blocked persons may control by means other than a majority ownership interest. Such entities may be the subject of future designation or enforcement action by OFAC.
Furthermore, a U.S. person may not procure goods, services, or technology from, or engage in transactions with, a blocked person directly or indirectly (including through a third- party intermediary).
AKA = “also known as,”
Acronym for “also known as,” commonly used on sanctioned entities or persons lists in reference to an alias or multiple aliases or multiple spellings of an individual’s name. Sanctions lists such as the US Treasury Department’s OFAC SDN list contain many AKAs.
OFAC includes these AKAs on its lists because, based on information available to it, the sanctions targets refer to themselves, or are referred to, by these names.
Weak AKA
A “weak AKA” is a term used by OFAC for a relatively broad or generic alias that may generate a large volume of false hits.
Weak AKAs include nicknames, noms-de-guerre, and unusually common acronyms.
OFAC includes these AKAs because, based on information available to it, the sanctions targets refer to themselves, or are referred to, by these names. As a result, these AKAs may be useful for identification purposes, particularly in confirming a possible “hit” or “match” triggered by other identifier information.
Realizing, however, the large number of false hits that these names may generate, OFAC qualitatively distinguishes them from other AKAs by designating them as weak. OFAC has instituted procedures that attempt to make this qualitative review of aliases as objective as possible.
In the TXT and PDF versions of the SDN List, weak AKAs are encapsulated in double-quotes within the AKA listing, for example:
- ALLANE, Hacene (a.k.a. ABDELHAY, al-Sheikh; a.k.a. AHCENE, Cheib; a.k.a. “ABU AL-FOUTOUH”; a.k.a. “BOULAHIA”; a.k.a. “HASSAN THE OLD”);
- DOB 17 Jan 1941;
- POB El Menea,
- Algeria (individual).
WITH ALL THIS IN MIND – HOW CAN YOU BE SURE YOUR SANCTIONS FILTER IS WORKING PROPERLY?
Do you consider the New York rule that took effect January 1, 2017?
The Department of Financial Services, a New York regulator, issued a new rule in June, that expanded the responsibility of New York State banks to detect money laundering and terrorist financing.
The rule clarifies that banks must regularly test their “watch list filtering program,” as some banks previously failed to update data and verify its effectiveness.
Examples of deficiencies in the screening process include:
- Insufficient capacity to assess alerts;
- Filtering criteria that are too loose, generating too many “false positives”;
- Filtering criteria that are too strict, potentially missing real hits (false negatives);
- Closing alerts without proper investigation due to back log;
- Excluding certain transactions from the filtering process without first assessing the risk this poses;
- The company has no access to older alerts that have already been investigated or closed;
- Watch list filtering is not carried out frequently and not clearly scheduled;
- Persons and entities on the suppression list are not screened periodically or when changes are made to the lists;
- No up-to-date sanctions lists are used.
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