Sanction Risk Assessment is a key regulatory expectation, however, it is not a regulatory requirement. Sanction Risk is defined as direct exposure to embargoed jurisdictions or entities included on various sanction lists.
What is Sanctions Risk?
When an authority places sanctions upon a non-complying entity or organizations, it can make conducting trade and other financial activities with them extremely difficult. Sanctions are essentially penalties with the purpose to punish these entities, and the consequences of disobedience are often heavy. Sanctions are usually placed on countries or organizations whose activities are seen as threatening to international peace and harmony. In a few rare cases, law enforcement may even place sanctions on individuals.
Failing to identify and comply with sanction rules can lead to financial penalties, freezing of assets and even criminal proceedings. This may apply to the sanctioned country, as well as the entities dealing with them.
Sanction Screening Lists
Many financial institutions, especially those dealing with international banks, maintain sanctions screening lists. These lists may contain information about politically exposed persons, terrorists and other suspicious people. In some cases, the FI may have to deal with a company which has a sanctioned or suspicious person on its board of directors. They may also unknowingly be dealing with a shell company formed by a sanctioned country. Many countries use innovative ways to bypass the Sanction Risk put on them and re-enter the international financial market.
To avoid falling into the trap of these entities, Financial organizations screen their clients against a number of these lists. Collectively, these lists are called 'Sanctions Lists'. Screening can be a long and tedious process, and they need to apply thorough due diligence and weed out any dubious individuals.
Governing bodies like the Office of Foreign Assets Control (OFAC), The United Nations and the European