More Than Sanctions Screening Needed to Meet Gov’t Compliance Expectations, Experts Say

Compliance departments need to be increasingly “creative” to catch goods or transactions that may be tied to Russian sanctions evasion, an industry official and former Treasury Department official said this week, especially as the U.S. and its allies ramp up enforcement. They also said compliance is growing more complex, particularly for financial institutions, which must meet expanding government expectations outlined in joint alerts recently published by the Commerce and Treasury departments.

One alert (see 2212160027), released last year, put companies “on notice” about the types of red flags they should be monitoring for potential Russia sanctions and export control evasion tactics (see 2207130014) and signaled more due diligence responsibilities for financial institutions (see 2210060043). Another, released in May, included a list of “high priority items” to monitor along with their Harmonized System codes (see 2305190059).

Brian Grant, a compliance manager with Mitsubishi UFJ Financial Group, said export control and sanctions compliance responsibility has “primarily” been “on the side of the corporation.” But “I don't think that that means that there's nothing that banks can do,” Grant said during an Aug. 15 webinar hosted by Kharon, a compliance risk advisory company. “And that's clearly what we've seen in two advisories now.”

He said some financial institutions aren’t sure how to meet the government’s increased expectations. “The common pushback and response from financial institutions, and this is a valid response,” is “what do you expect us to do? We're banks,” Grant said. He noted that banks don’t normally see HS codes or specific product descriptions in payment transactions, and even if they did, some items that Treasury and Commerce listed in their joint alert are “very generic.” One description is: “electrical parts of machinery or apparatus.”

“So screening is not a great response to it,” Grant said. “If you spend all your time trying to screen for generic goods, you're going to have a lot of false positives, and you're going to distract, take away compliance resources [for] low-yield activity.” He said financial institutions need to combine their screening efforts with other tools and data, including solutions from compliance vendors or open-source information, to help them conduct due diligence.

“We're in a new era now. There's a lot of information that's out there that didn't exist 20 years ago,” he said. “There's been an open source revolution.”

Howard Mendelsohn, a former Treasury official and now Kharon’s chief client officer, agreed. He said that when he first left the government and began to work for a “large bank,” he asked: “‘How do we handle export control stuff?’ And the answer was just simply, ‘Oh, we don't. That's really on the corporations, our clients, to deal with understanding their own product and controls.’

“Obviously, things have changed a great deal since then.”

Mendelsohn said just as banks are facing a larger compliance burden, corporations are also seeing greater due diligence expectations from the government, especially to “understand what happens downstream.” He added that compliance is never going to be “perfect,” but companies and banks can shield themselves from liability by having robust procedures in place.

“A silver bullet, that doesn't exist,” Mendelsohn said. But “if something does go sideways, if there are a lot of stakeholders involved in that supply chain” and “the questions come at you, what do you want to be able to do as far as demonstrating you have a program, you're exercising real diligence, you've got a C-suite understanding of the challenges, you've got a decent investment to kind of tackle this?”

Grant said he hears people compare sanctions administered by Treasury, and efforts to comply with those sanctions, to a “game of whack-a-mole,” particularly because designated Russian targets are “very experienced” at operating in ways that obscure their true identities, including by doing business through front companies. “You designate or take action against one, and another one's going to pop up,” he said. “But it's a game of whack-a-mole we got to play, at least to some extent.”

Both Grant and Mendelsohn stressed that sanctions compliance and enforcement will remain a high priority for the government. Mendelsohn pointed to DOJ's recent hire of 25 new sanctions and export control prosecutors (see 2303070023), and said Commerce’s Bureau of Industry and Security is also “staffing up.”

He also pointed to the “good handful of arrests” of people “very wittingly conspiring to figure out how to acquire product and move it to Russia,” including indictments in May for illegal exports of dual-use technologies and aircraft parts to Russia (see 2305170033). A BIS official said those charges were “just the beginning” (see 2305170033).

Mendelsohn noted enforcement agencies haven’t yet announced criminal action “hitting any sort of institution. And so the question is: is that coming?” he said. “No one can know for sure, unless you're on the inside of this.”

But, he said, the government has been increasingly focused on convincing industry to submit voluntary disclosures. Commerce, Treasury and DOJ issued a joint alert last month that outlined recent changes to voluntary self-disclosure policies for sanctions and export control violations and urged companies to disclose any offenses (see 2307260022 and 2307310017). Mendelsohn said the administration is “really trying to lean into, it looks to me at least, getting industry more comfortable with being proactive and putting things forward.”