Sanctions risk assessment is a critical process that companies undertake to ensure compliance with international regulations and to avoid potential legal and financial repercussions.
The sanctions risk identification is a process that involves the review of regulatory requirements, review of historical transactions, and sanctions compliance breaches. Risk identification also involves the analysis of various conditions that highlight the breaches of internal controls and any possible management bias for the actual financial crime incident.
The identification process is also a forward-looking activity to assess the possibilities of reoccurrence of sanctions risks and incidents. To assess the reoccurrence, the investigators analyze the historical data and currently available data to establish the interconnections between them. This connection assessment helps in the prediction of possible future sanction non-compliance.
All the processes and activities are studied to find the sanctions compliance controls weaknesses and possible avenues, which may be exploited by the criminals to detect the incidents. It also contains an assessment of the likelihood of the occurrence of the risk and the potential impact it carries. Sanctions risk detection is an ongoing process performed to assess the possibility of the occurrence of sanctions risks in any particular department area.
Sanctions Risk Assessment
The sanctions risk assessment is defined as the process of understanding and analysis of sanctions risks to which the organization is certainly exposed.
The possibility of occurrence of risks necessitates the risk assessment periodically. Sanction incidents in organizations result in the depletion of profits, operating inefficiencies, and reputational losses. For organizations, risks are potential incidents and events that could occur and influence the achievement of the organization’s core objectives and goals.
Sanctions risk assessment is about understanding the nature of such potential incidents and events and taking appropriate measures to address the threats posed by such potential risks. The risk assessors develop or design the preventive and detective sanctions compliance controls. Devising risk mitigation strategies based on the risk assessed is important because unaddressed sanctions risks may negatively impact the organization’s reputation. Risk assessment helps to evaluate the sanctions risks and report them to management.
A knowledge base is created through meetings and coordination to perform a risk assessment with different people in the organization. Such coordination and meetings may include interviews, discussions, and observations of the processes and activities. Process owners are the people who possess the actual knowledge base of the operations and activities in their relevant departments. Therefore, their input values the overall sanctions risk assessment process.
Risk assessment involves the assessment of the likelihood of the occurrence of the risk and the potential impact it carries. Assessing the likelihood is a subjective process because relevant data or information is not available to the organization that accurately predicts the likelihood of a particular financial crime risk.
To assess the likelihood of the sanctions risks, the organization may consider various factors such as past incidents, the prevalence of risk in the industry, internal control environment, available data, prevention efforts by management, ethical standards followed, unexplained losses, customer complaints, etc.
Once the definition of impact and likelihood are assessed, the inherent impact risk assessment is performed for identified sanctions risks. Impact means the financial loss the organization may face if the risk occurs. The impact may also be linked to the organization’s reputation, but usually, quantification elements are considered to assess the inherent impact of the risk. Based on general assessment and utilization of available information, the risk assessor develops or designs the preventive and detective sanctions compliance controls in various processes and activities of the organization.
Final Thoughts
Sanctions risk identification and assessment are paramount processes in safeguarding an organization from potential regulatory pitfalls and financial liabilities. This involves a meticulous review of regulatory requirements, past transactions, and breaches to predict future compliance challenges. By analyzing historical and current data, as well as the conditions under which sanctions breaches have occurred, organizations can highlight potential weaknesses in their internal controls. This not only aids in predicting potential future non-compliance but also exposes avenues that criminals might exploit.
Organizational collaboration, via discussions and observations with process owners who possess intimate operational knowledge, enhances the efficacy of this assessment. It is crucial to underscore that the likelihood and impact of sanctions risks, although somewhat subjective, can be gauged by considering various indicators, such as past incidents, industry trends, and the organization’s internal control environment. Ultimately, comprehensive risk assessment informs the development of both preventive and detective measures, ensuring an organization remains compliant and minimizes potential reputational and financial harm.
