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| Chua Choon Hong, Head of Financial Crime Practice Group, APAC and Middle East, Moody's Analytics / Courtesy of Moody's Analytics |
By Chua Choon Hong
It's been 14 months since Russia ramped up its invasion of Ukraine, and countries in the Asia-Pacific (APAC) and the West responded with wide-ranging economic sanctions. Complying with these sanctions has been a massive challenge for financial institutions such as banks in APAC, who face major penalties and reputational damage if they get it wrong.
Recently, sanctions violations led to fines of $98 million for a major U.S. bank, and $53 million for a U.S.-based virtual currency exchange. The U.S. also fined an Australian logistics firm $6 million for breaking sanctions rules, highlighting its ability to target companies in APAC with extra-territorial powers.
Authorities in APAC and the West have rapidly increased the number of sanctioned?individuals and entities from Russia and its ally Belarus, and created a labyrinthine set of compliance requirements to?navigate.
The scale of this risk was reflected in the number of sanctions risk events on Moody's GRID risk database increasing by 67.5 percent in 2022.?
Heavy sanctions changes
The sheer weight of compliance changes that APAC financial institutions must absorb quickly is causing major challenges. For example, a tenth EU package was announced in mid-February, requiring companies doing business in the EU to comply with sanctions, including asset freezes, travel bans, and trade and investment restrictions.
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Singapore, Australia, New Zealand, South Korea and Japan announced autonomous sanctions packages against Russia and Belarus. Most of these rules do not extend beyond national boundaries ― for most APAC financial institutions, the bigger risk comes from extra-territorial U.S. enforcement.
Financial institutions bear a huge responsibility to keep up with emerging requirements, particularly in Asia, where local laws add to compliance weight and complexity.
Corporate response
According to Global Investigations Review (GIR), many APAC companies have been reassessing long-standing business relationships in Russia and Belarus given the sweeping new rules. GIR highlighted risks from increasing numbers of sanctioned individuals and entities located in, or with economic interests in, APAC. These may be direct transaction counterparties or indirect beneficial owners or shareholders.
The complexity is so great that many APAC companies have turned down business with legitimate companies ― particularly in major trading hubs such as Singapore and Hong Kong. Large financial institutions in these hubs ― several of which have faced significant sanctions enforcement action ― widely observe U.S., EU and U.K. sanctions rules, regardless of the legal necessity, said GIR.
Enforcement actions by U.S. and European regulators show how seriously they take compliance rules such as identifying sources of funds sources. Similar to what European and U.S. financial institutions are doing, it's good practice for APAC banks to know the source of funds, and whether or not they have a direct relationship with the transacting party.
Hidden risks
While the number of entities on sanctions lists has grown rapidly, the sanctioned parties behind them are growing on an even larger scale.
APAC financial institutions are having to become more familiar with complex regulations such as the U.S. 50 percent ownership rule, which prohibits business with organizations owned more than 50 percent by sanctioned parties.
A scenario from GRID, a politically exposed person (PEP) and adverse media database, shows three individuals sanctioned in March 2022 were connected to 42 other sanctioned entities on the list. GRID uncovered 194 additional entities sanctioned "by extension" through U.S. ownership rules, but were not on sanctions lists. Without the right datasets, screening systems miss these hidden risks.
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Most APAC banks screen against a sanctions list during onboarding, but may not monitor changes to clients' organizational structures proactively ― this is where compliance teams need to check the entities' wider connections using timely, accurate, and risk-relevant data, combined with ownership and control information.
In this complex and changing environment, compliance teams must find ways to uncover risk and manage sanctions rules efficiently and effectively. Understanding exposure to complex corporate structures can be challenging, but by combining risk-relevant sanctions data with ownership and control information financial institutions can ensure they're sticking to the right side of the rules.
The writer is Head of Financial Crime Practice Group, APAC and Middle East, Moody's Analytics.
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