In today’s complex regulatory landscape, sanctions compliance has evolved from a regulatory obligation to a critical business necessity. Organisations are under increasing scrutiny, with the risks of non-compliance ranging from financial penalties and reputational harm to criminal prosecution.
The Institute of Certified Public Accountants of Cyprus (ICPAC) has recently published comprehensive case studies that delve into real-world challenges and solutions in sanctions compliance. From these examples, MK Compliance Limited shares practical steps to help businesses navigate this high-risk landscape effectively.
Sanctions violations can affect the operations, reputation, and result in severe financial repercussions for organisations. ICPAC’s case studies reveal how even routine transactions, when mismanaged, can lead to significant compliance failures.
Common issues highlighted include dual-use goods, luxury items, and questionable payment practices. For example, neglecting to identify red flags—such as abnormal shipping routes or transactions routed through non-sanctioned jurisdictions—has proven costly for businesses. Recognising these risks and taking preventive action is critical to safeguarding your operations.
Case Study 1: Circumventing Sanctions with Structured Transactions
A company trading luxury goods structured sales to fall below the €300 per-unit threshold specified in EU sanctions. This tactic was uncovered during onboarding when the client disclosed their intent to evade sanctions.
Measures Suggested by ICPAC:
- Risk Assessment:
- Implement a sanctions risk assessment framework to identify transactions involving thresholds or restrictions.
- Evaluate the client’s historical trading behaviour and jurisdictional risks.
- Due Diligence:
- Scrutinise the client’s business rationale and the method of transactions.
- Obtain and review all trade documents, including bills of lading and sale agreements.
- Transaction Monitoring:
- Monitor transaction patterns for structuring activities, such as consistent small transactions involving luxury goods.
- Use automated systems to flag transactions designed to bypass sanctions thresholds.
- Reporting Obligations:
- Report suspected sanctions breaches or circumvention attempts promptly to ICPAC and other relevant authorities.
Case Study 2: Misleading Payment Channels
A company in the oil sector rerouted payments to a sanctioned Russian entity through a third-party firm in the British Virgin Islands (BVI). This change in payment flow raised circumvention concerns.
Measures Suggested by ICPAC:
- Risk Assessment:
- Identify red flags in payment methods, such as changes in jurisdictions or involvement of high-risk intermediaries.
- Develop a framework that flags transactions involving jurisdictions often used for circumvention.
- Due Diligence:
- Verify the legitimacy of counterparties and ensure payments comply with sanctions.
- Investigate the business rationale for using third-party jurisdictions.
- Collect and review payment evidence and agreements.
- Transaction Monitoring:
- Monitor payment routes and channels for sudden changes.
- Flag payments involving high-risk jurisdictions such as the BVI.
- Reporting Obligations:
- Document and report all findings to ICPAC and any competent authorities.
Case Study 3: Suspicious Ownership Transfers
An individual transferred shares in a company to a family member just before being listed as a sanctioned entity. This tactic was flagged as an attempt to obscure the individual’s connection to the company.
Measures Suggested by ICPAC:
- Enhanced Due Diligence:
- Conduct a thorough review of ownership structures, particularly recent changes.
- Verify the ultimate beneficial ownership (UBO) and scrutinise links to sanctioned individuals.
- Request and review all relevant sale agreements and payment evidence.
- Risk Assessment:
- Include red flags for sudden ownership transfers in the sanctions risk framework.
- Investigate transactions close to sanctions announcements for potential circumvention.
- Reporting Obligations:
- Notify ICPAC of suspected ownership manipulation to evade sanctions.
Case Study 4: Dual-Use Goods Without Proper Checks
A company trading in microchips (classified as dual-use goods) relied on supplier assurances instead of conducting independent checks, leading to a potential breach of sanctions.
Measures Suggested by ICPAC:
- Due Diligence:
- Verify the origin and destination of dual-use goods against sanctions lists.
- Obtain end-user and end-use certificates for all dual-use goods.
- Cross-check goods against the EU Dual-Use Regulation 833/2014 and TARIC platform.
- Licensing and Export Controls:
- Ensure that valid export licences are obtained for dual-use goods.
- Review contracts for clauses prohibiting re-export to sanctioned countries.
- Transaction Monitoring:
- Develop a monitoring system to flag high-risk goods and non-standard shipping routes.
- Collect and review shipping documents, bills of lading, and other trade documentation.
- Reporting Obligations:
- Report any suspicious activities or breaches to ICPAC immediately.
ICPAC’s General Recommendations for All Scenarios
- Risk Assessment
- Establish a risk-based compliance framework tailored to your operations, goods, and jurisdictions.
- Identify and incorporate red flags such as unusual shipping routes, sudden ownership changes, or new payment intermediaries.
- Enhanced Due Diligence
- Conduct comprehensive checks on clients, counterparties, and UBOs.
- Scrutinise the business rationale behind transactions and payment flows.
- Require supporting documentation such as end-user certificates, export licences, and payment evidence.
- Real-Time Transaction Monitoring
- Use advanced monitoring systems to flag anomalies in transaction patterns, routes, or payment channels.
- Compare transaction volumes and values against historical norms to detect irregularities.
- Training
- Train staff regularly on sanctions regulations, circumvention tactics, and red flags.
- Customise training programmes to meet the needs of different departments.
- Reporting and Documentation
- Establish protocols to report breaches or circumvention attempts to ICPAC and other relevant authorities.
- Maintain detailed records of all due diligence and compliance efforts.
The ICPAC case studies highlight the importance of vigilance, proactive measures, and a strong compliance culture.
MK Compliance Limited can provide daily/weekly/monthly updates on sanctions, and AML regulatory developments. These updates ensure that you are kept informed about the latest regulatory changes, therefore ensuring comprehensive compliance.
In addition, we provide sanctions-related consulting services, including legal opinions, transaction reviews, screenings and background checks on your clients and related individuals/entities/counterparties, to ensure your business operations remain fully compliant with all applicable sanctions, mitigating the risk of breaches.
The content of this article is valid as at the date of its first publication. It is intended to provide a general guide to the subject matter and does not constitute legal advice. We recommend that you seek professional advice on your specific matter before acting on any information provided.
For further information or advice, please contact info@compliancemk.com.
