Why Understanding and Monitoring Sanction Lists is Crucial for Business Due Diligence
24 August 2023 15:10
- Risk Management
- Nexis Diligence+™
- Anti Money Laundering
- Due Diligence
- Sanctions & Watchlists
- Risk & Compliance
Sanctions are often hot topics of international news reports, especially as they relate to foreign governments and international relations. But, you may not realize that sanctions can be levied to any entity that violates regulations.
Sanctions are also important to businesses, and working with those who have been sanctioned can have serious consequences. As such, monitoring and understanding sanction lists is a key step to doing due diligence, especially in industries like finance and commerce.
In this article, we will outline the topline information about understanding and monitoring sanction lists to provide key information for a business’s security and liability. And, we’ll show why regular review of sanction lists is crucial to any business in this new era of due diligence.
What are sanction lists?
National security measures like thorough sanction are a way in which countries remain safe amidst global threats. In general, they can be imposed by a single country or unilaterally against an organization, individual, or country to encourage a change in behavior or punish non-compliance with regulations. Often, sanctions aim to maintain national security by blocking trade and regulating relationships with potentially threatening subjects.
An entity can be added to such lists for reasons like money laundering, terrorism or terrorist financing, drug trafficking, human rights violations, arms proliferation, and violation of international treaties.
However, there is not simply one unified list of all these sanctions, and there are different categories of lists. It’s worth understanding why entities can be sanctioned under each category and have a basic understanding of well-known lists to monitor.
Types of sanction lists
Sanction lists are made by governing bodies and can contain individuals, organizations, and/or countries and their regimes. They are often of financial, political, or diplomatic nature and are enforced around areas of crime or threat. While we’re mainly focusing on financial sanctions in this article, other kinds of sanctions are crucial parts of national safety—such as those diplomatic sanctions imposed on North Korea for their nuclear testing.
Financial sanctions are geared directly toward protecting funds from theft, bribery, and corruption. Put simply by Sanction Scanner, economic sanctions “play a crucial role in preventing financial crimes and ensuring compliance with AML laws and regulations.”
Some prominent economic sanction lists include the following:
- United Kingdom consolidated sanction list
- The United Nations Security Council (UNSC) sanctions list
- The U.S. Treasury Department’s Office of Foreign Asset Control (OFAC) two sanctions lists, the Specially Designated Nations (SDN) list and the consolidated sanctions list
- The European Union (EU) sanction list
You may already know of these lists and how they impact your industry. But if you are not regularly monitoring these lists as a part of your due diligence research, you’re leaving yourself open to potential consequences brought about by engaging in partnerships with included entities.
In the next section, we’ll explain why keeping track of these lists is vital and how you can use sanction lists to protect your business.
The importance and utility of sanction lists
The above lists are used to keep nations secure and to protect businesses from money laundering and other major threats. It’s therefore imperative that companies know the lists well and abide by them—not only for the sake of a business’s financial health, but also because of the legal risks involved. Let’s review the main protections sanction lists provide.
Protecting national security and foreign policy interests
When it comes to foreign policy, the diplomatic and political sanctions are key to ensuring that countries remain safe from external threats. These lists contain entities that are tied to terrorism and human rights abuses; according to the Practical Guide to Humanitarian Law, they are a “central component of the Global counterterrorism strategy.” This is often top of mind when the public thinks about sanctions and are likely already on your radar.
Preventing financial crimes and illicit activities
Financial sanctions have become an important way to deter criminal activity because they prevent organizations from conducting business with specific people, companies, or nations that are engaged in illegal activities, like money laundering or acts of financial terrorism.
In turn, this can limit the ability of the bad actor to conduct business or wield influence, thus curbing the possibility of continued illegal activity.
Ensuring compliance with legal and regulatory obligations
Because of their global importance, a major part of a company’s due diligence means checking for sanction list updates and abiding by them. Not doing so could result in massive fines and even jail time for those involved. Complying with regulatory obligations includes ensuring that all company data, assets, and practices are not overstepping sanction lists, which is crucial to overall due diligence.
In fact, companies who disobey the OFAC, for example, can face exorbitant fines and prison time up to 30 years.
Safeguarding business reputation and integrity
If the legal and global threats aren’t enough motivation, there’s also the matter of business reputation. Even if one member of a business is found breaking sanction protocol, it could reflect negatively on the entire company, potentially losing clients as trust in the organization rapidly decreases.
This goes beyond the scope of internal business relations as it includes suppliers and anyone else you might interface with. Those third party practices can also have major consequences for a business and their reputation—the Department of Justice details that fines and jail time are also possible when business partners are involved in illegal activity.
Challenges of monitoring and complying with sanction lists
With so many sanction lists, it can be overwhelming to keep up with the data you need to conduct business. Manually monitoring lists is certainly one way to ensure compliance, but it’s far from fool-proof. Lists are updated randomly, as frequently as multiple times per week, so it’s impossible to predict when new entities will be added, meaning employees would need to spend a great deal of time scanning sanctions lists daily—which is time most professionals don’t have.
Manual scanning also requires employees to find ways to make cross-company announcements each time a new entity is added to a list, which could result in time loss due to the extensive and mundane task of communicating these changes and implementing them in a manual way.
Best practices for understanding and managing sanction lists
Now that you know why you need to monitor for sanctions, here are the best practices to maintain thorough due diligence.
Establish a robust due diligence process
Due diligence should be engrained in company culture and taught early in trainings for future employees. Companies should require regular individual due diligence meetings so that each member of the organization is up to date on all practices and is aware of the risks of not obeying these laws.
Some companies might implement an annual or quarterly test to see if employees are truly considering due diligence while conducting business, like a phishing test for emails, which helps identify any weak spots or vulnerable teams who might be putting the organization at risk.
Conduct regular and thorough screenings of customers, suppliers, and partners
It’s not enough to only screen prospective entities—a company should ensure that their current connections are also included in their regular screenings as to avoid any accidental illegal engagements. It’s also vital to remember that investors and suppliers could harm a company’s integrity if they’re not adequately screened, so expand your efforts to anyone who could impact your business reputation.
If you have an in-house data analysis or risk management team, integrating a robust set of enriched and curated data in your in-house ERM system can allow you to access critical information to keep on top of your risk monitoring. This is an efficient way to protect the value of your brand and your company’s reputation.
Use technology to enhance your due diligence efforts
If you don’t have in-house capabilities for data management, the best option for screening sanction lists is through a third-party scanning tool that will automatically update internal stakeholders upon finding new entries.
Diligence tools offer a deeper level of security by constantly reviewing these lists, performing checks on over 1,400 sanction lists across 80 countries and personal profiles of over 1.4 millions political exposed persons (PEPs). This alleviates individual employees from the painstaking task of scanning potential updates, thereby reducing the chance that important updates are missed and mitigating risk.
The best sanction screening and due diligence tools will offer companies a wide variety of scanning services, including lists they aren’t even aware exist. They also offer real-time alerts and will scan for negative news of any potential partners to alert you to even non-sanction related illegal actions, allowing you to react immediately and get ahead of the consequences.
On top of this, due diligence tools will usually allow for further deep dives into potential clients, so that businesses can “gain visibility into hidden connections that may expose [an] organization to financial crime, bribery, or corruption.” This ensures that any third party has already been well-vetted and is trustworthy, so it’s far less likely those automated screenings will ever present a surprise problem.
Developing a response plan for dealing with potential threats
Finally, a company should have a plan of action in regard to what happens if the worst-case scenario comes to life. If an entity is named to a sanction list, and a business already has a relationship with that entity, it’s important to consider what steps should follow.
Often, this means having contract termination paperwork on hand and an internal legal team who can assist in navigating this issue. Employees should be made aware of how to flag and handle these events, so that if and when they happen, the reaction is swift and painless.
Keep up to date with due diligence and emerging compliance risks
Sanction lists are a way that nations keep themselves, and their businesses, safe from international threats like terrorism and money laundering. For organizations, staying on top of sanctions is a key part of due diligence, and any failure to comply could result in fines, jail time and loss of integrity, which could mean major losses for the business and its employees.
In addition to monitoring sanctions lists, need to keep up with due diligence trends to ensure that they remain compliant and prevent due diligence failures. Furthermore, by integrating data, like API sets, into your own systems or using a third-party tool to search through thousands of potential risks and send real-time alerts to all necessary parties, you can maintain compliance and protect your company’s reputation.
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