Introduction
The Financial Conduct Authority (FCA) has taken a proactive stance in ensuring that financial firms meet their obligations in the face of rapidly changing global events. In response to Russia's invasion of Ukraine, the FCA recently published a paper titled "Sanctions Systems and Controls: Firms' Response to Increased Sanctions." Within this paper, the FCA identifies several critical areas where firms need to improve their management of sanctions. In this blog post, we will explore these areas and understand the FCA's expectations for firms' responses.
1. Governance and Oversight
One of the key areas highlighted by the FCA is the need for robust governance and oversight of sanctions risks. Senior management must be provided with sufficient Management Information (MI) to fulfil their responsibilities effectively. Instances were noted where multinational firms relied on systems and processes from other jurisdictions, resulting in limited knowledge of sanctions risk management in the UK. Additionally, there was a lack of both quantitative and qualitative MI, hindering senior management's ability to understand and manage risks effectively. The FCA emphasizes the importance of having appropriate MI to enable senior management to grasp the sanctions risks applicable to their firm.
2. Global Sanctions Policies
Global firms often grapple with aligning global policies with specific national sanctions regimes. Some firms primarily focused on U.S. sanctions, diverting insufficient attention to the UK sanctions regime. Poor communication between global and regional sanctions teams exacerbated the issue. A lack of awareness regarding UK sanctions law, regulations, and guidance was identified as a risk factor. As UK legislation evolves, firms must keep pace to avoid non-compliance.
3. Over-Reliance on Third-Party Tools
Several instances revealed firms' inadequate understanding of their sanctions screening tools, including calibration and update schedules. This led to uncertainty about whether they were screening correctly, missing names, or generating excessive false positives. Effective control and oversight of sanction screening tools are crucial, involving regular testing and internal service-level agreements (SLAs) for list updates.
4. Contingency Planning
The paper underscores the importance of contingency planning. Firms that had conducted risk assessments related to Russia and developed contingency plans were better prepared to introduce risk-reducing measures, such as revising thresholds or suspending payments to/from Russia. Lessons learned from responding to increased sanctions should inform future contingency planning, ensuring firms are well-prepared for potential future events or further sanctions escalation.
5. Skills and Resources
Many firms faced backlogs in assessing, escalating, and reporting alerts due to resource constraints. This affected their ability to promptly identify and report exposures. Backlogs often stemmed from a lack of governance and internal SLAs. Some firms lacked the internal expertise required for effective screening, relying on external legal or consulting resources.
6. Screening Capabilities
FCA assessments revealed instances where sanctions screening systems were not effectively calibrated. Some systems generated excessive false positives, while others failed to detect sanctioned individuals. Understanding system calibration is vital to strike the right balance.
7. Customer Due Diligence (CDD) and Know Your Customer (KYC)
Backlogs in CDD and KYC assessments, coupled with low-quality assessments, increased the risk of firms failing to identify sanctioned individuals. Incomplete ownership structures of entities were identified as an issue. Firms must gather sufficient information and conduct thorough KYC and CDD to ensure compliance with sanctions requirements.
8. Breach Reporting
Timely breach reporting is critical. Some firms displayed inconsistencies in reporting, with delays ranging from weeks to months. Delayed or omitted reporting undermines the FCA's ability to understand and address systems and controls issues promptly.
Conclusion
The FCA's paper on sanctions systems and controls serves as a call to action for financial firms. In an increasingly complex and rapidly changing global landscape, it is imperative that firms elevate their sanctions compliance efforts. By addressing the areas highlighted by the FCA, firms can not only meet their regulatory obligations but also enhance their resilience in the face of evolving sanctions and geopolitical events. The lessons learned from this paper should guide firms in building stronger systems and controls to navigate the challenges of today's world.
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