The Rise of GATCAPreparing for the new reality of global tax compliance and account reporting systems

Deconstructing Today’s Volatile Sanctions Landscape – How to

Keep Your Institution Protected

ACFCS WebinarSeptember 10, 2014

Presented ByPascal Aerens, Head of Product Strategy, Fircosoft

Daniela GuzmanAssistant Editorial Director

Association of Certified Financial Crime SpecialistsMiami, FL

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Deconstructing Today’s Volatile Sanctions LandscapeChallenges, Trends and Best Practices

Pascal AerensHead of Product Strategy

World news, UkraineIran, Russia and the changes in sanctions

Global trends in Compliance, andhow to adapt

Questions, answersand further exchangeof views.

How the Arab Spring, Iran and Ukraine changed sanctions for ever

A changing world

Friends can change quickly

Libya

Syria

Egypt

Egypt

Egypt

Iran

Possible switchfrom total sanctions to targeted sanctions

Iran

New sanctions (29 Aug)Deadline set to Nov 27Uncertainties on deal

Africa Africa

Nigeria: Boko Haram, AnsaruSomalia: al-ShabaabSudan Cote d’ivoire, CAR, Mali…AQIM

Source:

Libya

Iraq

Syria

Islamic State

Islamic State

Extortion

Hostages

Oil

Donations

Islamic StateAl Hayat Media CenterTwitter + video multi-language (including EN)

Al Furqaan Media ProductionsMilitary operationsIslamist forums

MT MujatweetsAdvertisement videos featuring westerners who joined jihad

Ukraine

An intermediary diplomatic escalation tool

Between condemnationsand warS

anct

ions

Political situation can change completely overnight.

Sanctions remain the favorite tool to pressure hostile groups.

Banks remain a critical point to implement them.

Shifting the cost of foreign policies to the banks Financial warfare

Who will be the bad guy tomorrow ?

Today sanctions are US centric

Burma

Côte d’Ivoire

Sudan

North Korea

Iran

Belarus

Lebanon

Somalia/Eritrea

Guinea

Tunisia

Syria

Libya

Egypt

201120102009200820072006

Burma

Côte d’Ivoire

Sudan

North Korea

Iran

Belarus

Lebanon

Somalia/Eritrea

Guinea

Tunisia

Syria

Libya

Egypt

201120102009200820072006

Today sanctions are US centric

GlobalPower index

Source: National Intelligence Council

but tomorrow in a multipolar world ?

Focus on the sanctions against Russia

Global map

Language divide in Ukraine

January 2014 protests

Crimea annexed, SE of Ukraine unrest (Feb ‘14)

Sanctions first round announced (March ‘14)

MH-17 (July ‘14)

Who is next after Crimea ?

Source: National Security and Defense Council of Ukraine

NATO expansion (1949-2009)

Russian GDP growth forecasts

Source: ICEF Monitor

Energy independence critical for EU

Gas pipelines running through Ukraine

What is special about the Russian sanctions?

UN Security Council permanent member Important economic partner (mainly for Europe) Indirect sanctions (50% rule) Sanctioned entities all have Russian names

Sanctions

Source: BBC

Summary

First Round (March) Two Executive Orders imposing sanctions on 31 individuals in Russia

and Ukraine and one Russian Bank. No restriction on trade and investment with Russia, except with the

sanctioned persons. Entities where these persons have more than 50% direct or indirect

ownership are also off-limits. Text foresees both ownership and control

New round (Joint EU/OFAC, Aug 1st) Adds dual-use goods, arms, energy and imposes restrictions to

access to capital markets for 5 banks (Sberbank, VTB Bank, GazpromBank, VneshcomBank and RosselkhozBank)

On OFAC there are 2 more banks (Bank of Moscow and Russian Agricultural Bank) so USD transfers must be blocked

Normal sanctions implementation path

Resolutions

Memberstates

UNSecurityCouncil

ImplementSanctions

US EU

ImplementSanctions

ImplementSanctions

The 50% rule

Compared to the rest of the SDN entities, the 50% rule is something specific to these executive orders: If a sanctioned entity owns more than 50% of entity X,

then transactions of X have to be blocked as well, even though X does not appear explicitly in the list.

This requires the KYC and Due Diligence processes to find Ultimate Beneficial Ownership in order to assess that an entity is “clean” Potential high cost for compliance Manually intensive process Will slow down onboarding in some business lines Risk-based approach

Example

Controlsboard membership

ExampleAct with caution

Controlsboard membership

Sanctions on Russian oligarchs

Detection challenges : due diligence

Detection challenges : Russian name topologySECHIN, Igor; DOB 07 Sep 1960; POB St. Petersburg, Russia (individual)

Looking for Игорь Иванович Сечин ?

No patronymNo cyrillicOFAC

PEP listPatronymOriginal Script (Cyrillic)not necessary if detection enginesupports transliteration

Nationality (structured)

Occupation(s)

Complexity of indirect holdings

Igor Sechin Vladimir Putin

associate

CEO

UnitedShipbuildingCorporation Board

member

Zvezda shipyard

100%50%

Shipbuilding Co(Finland)

partner

Joint-venture

Energy (Italy)

13%

Impacts on business lines

Private banking KYC/AML procedures. KYC monitoring. Direct relation with sanctioned person or indirectly through investment vehicle.

Trade Finance All operations Asset Management Risk for asset manager to hold debt

or securities of a company owned by a sanctioned person

Impacts on trade finance

Blocked operationsIdentical as for other SDN entities, but with 50% rule.

What to look for ?Content of trade finance financial messages (L/C) look for individuals, companies that are listed or associated to listed entities

Danger of intermediaries or subsidiariesTrade messages often include many counterparties, each in different roles. Not all roles are directly part of the operation, so sanctions may or may not apply (beware of indirect ownership here)

Risky industriesTrade finance in domains (Energy, Oil, Arms…) listed in sanctions

Sanctions effectiveness

Meanwhile in Moscow

In Russia, situation is seen as business as usual Sanctions are presented as having few impact. Business

has always to adapt to specific situations in Russia anyway, so nothing unusual.

There are concerns that sanctions could be expanded beyond the current scope, which could really hurt business.

The VISA and Mastercard transactions halt have created a short panic, as Russia discovered how dependent they were on these (US-controlled) networks. Announce of a Russian credit card routing solution just after was meant to show this situation may not last.

Service has been restored, in practice Russia remains dependent from the networks for the years to come

Since the whole idea was to boost domestic approval rate of Putin, Russia responds aggressively and is defiant about current and future sanctions.

Much talk and threats of imposing sanctions on the Russian side on EU and US companies and individuals.

A few US government members under travel ban (more a rhetorical move than real sanctions)

Small retaliation actions on US firms or close EU (ex-USSR) countries, but denied to be linked with sanctions.

So far, nothing strong enacted, but if EU/US sanctions are further expanded, it is understood there will be a reaction.

Meanwhile in Moscow

Russia vs. Ukraine on CDS spreads

Russian net capital flows

Source: Central Bank of Russia

Increased volatility in Russian stocks

Ruble / USD

Oligarchs loyalty maybe a key element the punished

the independents

the loyalists

Evolution of situation

Today: Crimea accepted as de facto partition Putin accepts Porochenko as president, but no real dialogue The goal for Russia is a neutralization of Ukraine Strategy is to make sure Ukraine is too busy fighting rebel groups to

concentrate on building a stable and prosper country. Gazprom used as an extension of the Russian foreign policy

(double-edged sword, Russia also wants to appear as a reliable energy partner, and its GDP strongly depends on this income)

Possible reactions from the West Extension of sanctions with 3rd round (with possible EU/US rift) Renewed VISA/MasterCard network shutdown

(also double-edged, could profit to UnionPay) Escalation to proxy war (EU/NATO vs. Russia) Revival of anti-monopoly action from EU against Gazprom Boycott of 2018 Football World Cup Acceleration of alternative gas pipelines projects in EU

Trends in sanctions

Evolutions in the sanctions compliance market

RegulatoryEvolutions

Sanctions are used more and more as a political tool They are not only targeting terrorism financing Regulators want banks to demonstrate they understand

their filtering tool.

SanctionsVelocity

Sanctions can become active extremely rapidly: it can only take days between the moment sanctions are threatened and they are enforced.

Banks have to be capable of fast & flexible deployment

SanctionsComplexity

In the future, sanctions will become increasingly complex: targeting selected individuals or groups, sectorial sanctions (dual-use materials), specific transaction types…

Banks need adaptable systems to cope with this.

ComplianceCost increase

The operational cost of compliance has grown to a point where it has become one of the major cost items

Banks are taking drastic actions to reduce this cost Software cost is minimal compared to cost of personnel

Detection challenges : relationships

Analytics at the heart of future solutions

KYC / CDDTransaction screening

Content & PolicymanagementCase Management

ANALYTICS

Importance of data availability and quality

The cost of compliance

Compliance cost vs. Regulatory Pressure

Reduce compliance cost

Consolidation of servicesConsolidation of servicesProcess streamliningProcess streamliningAutomationAutomation

Rise of the robots

Machine learning loop

Reducing costs: auto-resolution

Automates decisions on repetitive transactions Allows teams to focus on new or complex alerts Can proactively scale to handle volume increase Compelling ROI

How does it all fit together ?

Sanctionsvelocity

Volatile political situation

Cost of compliance

Increase in fines and penalties

Agile solutions

Automation

Added-valuecontent

Managedservices

Analytics

MultipolarWorld

Lower risk appetite

More agile and smart solutions for a fast-moving world

More complex and specific

sanctions demand new Content

future of compliance solutions

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