Key elements of sanction compliance play a pivotal role in safeguarding an organization from potential regulatory pitfalls and maintaining its reputation. At the forefront is the unwavering commitment of senior management. Their endorsement not only provides the necessary resources but also embeds a culture of compliance throughout the organization, ensuring that all levels prioritize adherence to regulations. Another crucial component is the sanctions risk assessment.
By understanding and evaluating the threats, an organization can strategically design its policies and procedures to mitigate these risks. Equally essential are robust internal controls that act as a line of defense against inadvertent violations. These controls, frequently updated to reflect the evolving landscape of sanctions, offer clarity on procedures and maintain records of potential prohibitions.
To ascertain the effectiveness of the compliance framework, periodic testing and auditing become indispensable. They pinpoint weaknesses and ensure that the organization remains compliant even as regulations change.
Lastly, training stands as the backbone, arming employees with the knowledge and tools to understand and act according to the sanction mandates. By emphasizing these key elements, an organization positions itself for success in the complex realm of sanction compliance.
Key Elements of Sanction Compliance
Below are the key elements of sanction compliance framework, to be developed and implemented to avoid the risk of sanctions related regulatory non-compliances:
Senior Management’s Commitments
The organization’s Senior Management should be a commitment to an organization’s risk-based sanctions compliance program which is one of the most important factors in determining compliance.
The management’s support is essential in ensuring adequate resources that are fully integrated into the organization’s operations, and also helps legitimize the sanctions program, empower the employees, and foster a culture of compliance, at all levels. Senior management’s commitment is a critical factor in determining the success of the implementation of the sanction compliance program, and effective management support includes the availability of adequate resources for the compliance function and support for the compliance team’s authority.
Senior Management includes senior leadership, executives, and/or the board of directors.
Management’s efforts generally are measured by the criteria including the ability of personnel to report sanctions-related misconduct by the organization or its personnel to senior management without fear of reprisal, senior management actions that discourage misconduct and prohibited activities, and highlighting the potential repercussions of non-compliance with sanctions. The sanction compliance program should be robust for compliance with sanctions requirements.
Senior management reviews and approves the organization’s sanctions compliance program and it ensures that the compliance function is delegated with sufficient authority and autonomy to deploy compliance policies and procedures, and effective controls.
Senior management ensures the existence of direct reporting lines between the compliance function and senior management, including routine and periodic meetings.
Senior Management must take, and continue to take, steps to ensure that the organization’s compliance function receives adequate resources including in the form of a strong compliance team, tools and technology, and other required resources, necessary to the organization’s compliance with the sanction regime.
Senior management sets and promotes a “culture of compliance” and demonstrates recognition of the seriousness of apparent violations of the laws and regulations administered by OFAC, or deficiencies, by the organization and its employees to comply with the compliance program, policies, and procedures, and implement measures to reduce violations. Such measures must address the root causes analysis of past violations or breaches and represent appropriate solutions.
Sanctions Risk Assessment
Risks in sanctions compliance are potential threats or vulnerabilities that, if ignored or not properly handled, can lead to violations of OFAC’s regulations and negatively affect an organization’s reputation and business. OFAC recommends that organizations take a risk-based approach when designing or updating an SCP. One of the central tenets of this approach is for organizations to conduct a routine, and if appropriate, ongoing “risk assessment” to identify potential OFAC issues they are likely to encounter. As described in detail below, the results of a risk assessment are integral in informing the SCP’s policies, procedures, internal controls, and training to mitigate such risks.
While there is no “one-size-fits-all” risk assessment, the exercise should generally consist of a holistic review of the organization from top-to-bottom and assess its touchpoints to the outside world. This process allows the organization to identify potential areas in which it may, directly or indirectly, engage with OFAC-prohibited persons, parties, countries, or regions.
The organization conducts or will conduct, an OFAC risk assessment in a manner, and with a frequency, that adequately accounts for the potential risks. Such risks could be posed by its clients and customers, products, services, supply chain, intermediaries, counter-parties, transactions, and geographic locations, depending on the nature of the organization. As appropriate, the risk assessment will be updated to account for the root causes of any apparent violations or systemic deficiencies identified by the organization during the routine course of business.
For example, an organization may conduct an assessment of the following:
customers, supply chain, intermediaries, and counter-parties;
the products and services it offers including how and where such items fit into other financial or commercial products, services, networks, or systems; and
the geographic locations of the organization, as well as its customers, supply chain, intermediaries, and counter-parties. Risk assessments and sanctions-related due diligence are also important during mergers and acquisitions, particularly in scenarios involving non-U.S. companies or corporations.
The organization has developed a methodology to identify, analyze, and address the particular risks it identifies. The risk assessment is updated to account for the conduct and root causes of any apparent sanction compliance violations identified by the organization during the business, for example, through independent testing or audit.
Internal Controls
An effective internal controls system, including policies and procedures, to identify, interdict, escalate, report, and keep records about activity that may be prohibited by the regulations and laws administered by authorities.
The purpose of internal controls is to outline clear expectations, define procedures and processes for OFAC compliance, and minimize the risks identified by the organization’s risk assessments. Policies and procedures should be enforced, weaknesses should be identified and remediated, and internal and/or external audits and assessments of the program should be conducted periodically.
Given the dynamic nature of U.S. economic and trade sanctions, a successful and effective sanction compliance program should be capable of adjusting rapidly to changes published by OFAC. These include the following:
updates to OFAC’s List of Specially Designated Nationals and Blocked Persons (the “SDN List”), the Sectoral Sanctions Identification List (SSI List), and other sanctions lists;
new, amended, or updated sanctions programs or prohibitions imposed on targeted foreign countries, governments, regions, or persons, through the enactment of new legislation, the issuance of new Executive orders, regulations, or published OFAC guidance or other OFAC actions; and
the issuance of general licenses.
OFAC compliance programs generally include internal controls, including policies and procedures, to identify, interdict, escalate, report, and keep records about activity that is prohibited by the sanctions programs administered by OFAC. The purpose of internal controls is to outline clear expectations, define procedures and processes for compliance, and minimize the risks identified by an entity’s risk assessments.
The organization has designed and implemented written policies and procedures outlining the SCP. These policies and procedures are relevant to the organization, capture the organization’s day-to-day operations and procedures, and are designed to prevent employees from engaging in misconduct.
The organization has implemented internal controls that adequately address the results of its risk assessment and profile. These internal controls should enable the organization to clearly and effectively identify, interdict, escalate, and report to appropriate personnel within the organization transactions and activities that may be prohibited by OFAC.
The organization enforces the policies and procedures it implements as part of its OFAC compliance internal controls through internal and/or external audits.
The organization ensures that its OFAC-related recordkeeping policies and procedures adequately account for its requirements according to the sanctions programs administered by OFAC. The organization ensures that its internal controls about sanctions compliance, identify and implement compensating controls until the root cause of the weakness can be determined and remediated.
The organization has communicated the policies and procedures to all relevant staff, including personnel within the compliance program, as well as relevant business segments operating in high-risk areas, and to external parties performing SCP responsibilities on behalf of the organization.
Testing and Auditing
Audits assess the effectiveness of current processes and check for inconsistencies between these and day-to-day operations. Comprehensive and objective testing or audit function within an SCP ensures that an organization identifies program weaknesses and deficiencies, and it is the organization’s responsibility to enhance its program, including all program-related software, systems, and other technology, to remediate any identified compliance gaps.
Such enhancements might include updating, improving, or recalibrating SCP elements to account for a changing risk assessment or sanctions environment. Testing and auditing can be conducted on a specific element of an SCP or at the enterprise-wide level.
A comprehensive, independent, and objective testing or audit function within an SCP ensures that entities are aware of where and how their programs are performing and should be updated, enhanced, or recalibrated to account for a changing risk assessment or sanctions environment, as appropriate.
Testing or audit, whether conducted on a specific element of a compliance program or at the enterprise-wide level, are important tools to ensure the program is working as designed and identify weaknesses and deficiencies within a compliance program.
The organization commits to ensuring that the testing or audit function is accountable to senior management, is independent of the audited activities and functions, and has sufficient authority, skills, expertise, resources, and authority within the organization.
The organization commits to ensuring that it employs testing or audit procedures appropriate to the level and sophistication of its SCP and that this function, whether deployed internally or by an external party, reflects a comprehensive and objective assessment of the organization’s OFAC-related risk assessment and internal controls.
The organization ensures that, upon learning of a confirmed negative testing result or audit finding about its SCP, it will take immediate and effective action, to the extent possible, to identify and implement compensating controls until the root cause of the weakness can be determined and remediated.
Training:
An effective training program is an integral component of a successful sanction compliance program. The training program should be provided to all employees and personnel periodically and generally should accomplish the following:
provide job-specific knowledge based on need;
communicate the sanctions compliance responsibilities for employees; and
hold employees accountable for sanctions compliance through assessments.
An adequate training program, tailored to an organization’s risk profile and all appropriate employees and stakeholders, is critical to the success of the compliance program.
The organization commits to ensuring that its OFAC-related training program provides adequate information and instruction to employees and, as appropriate, stakeholders to support the organization’s compliance efforts. Such training should be further tailored to high-risk employees within the organization.
The organization commits to providing training with a scope that is appropriate for the products and services it offers; the customers, clients, and partner relationships it maintains; and the geographic regions in which it operates.
The organization commits to providing OFAC-related training with a frequency that is appropriate based on its OFAC risk assessment and risk profile.
The organization commits to ensuring that, upon learning of a confirmed negative testing result or audit finding, or other deficiency of its SCP, it will take immediate and effective action to provide training to or other corrective action to relevant personnel.
Final Thoughts
The foundation of an effective sanction compliance framework is built on several key pillars. At its forefront is the unwavering commitment from Senior Management, which sets the tone for a culture of compliance throughout the organization. This is supplemented by a comprehensive Sanctions Risk Assessment, which offers a proactive approach to identify and mitigate potential areas of vulnerability, based on unique organizational touchpoints. Vital to the execution of the framework is a robust system of Internal Controls, geared towards transparency, adaptability, and continual alignment with current regulations.
Complementing these measures is a regular regime of Testing and Auditing to ensure that the established processes are functioning as intended and are adjusted as needed. The final linchpin is a comprehensive Training program, ensuring that every stakeholder, irrespective of their role, is informed, empowered, and held accountable in maintaining compliance. Together, these elements form a holistic approach to minimize the risk of sanctions-related non-compliances.