Sanctions compliance is a professional business now. In the early days, some 15 years ago, like any new domain, it was initially populated by people with a lot of goodwill, but not enough professionalism. Now that the sector has matured, it has become a lot more professional and the scope for interpretation and improvisation has gone.
This increased professionalism has largely been driven by increased professionalism on the part of regulators. Compliance regulation has also matured and become more stringent. Regulators are prepared to take firm action against those companies that fall foul of the law. Not only that – they have also extended their reach beyond those areas expressly defined by legislation. Adhering to the letter of the law is no longer enough.
What does this mean? Whereas a few years ago, regulators expected companies to abide by the law, they now expect more than that. Companies have to abide by the spirit of the law. This may not sound like a big change, but the implications are huge. It addresses matters such as the grey area of u-turn transactions. A u-turn transaction is when a banned financial transaction is made by a bank in one country (the US, for example) for the benefit of a bank in another country (Iran, for example) through offshore banks in places such as Switzerland. U-turn transactions hugely dilute the effectiveness of sanctions.
Since regulators have required companies to abide by the spirit of the law, any companies that send funds to one place, knowing that those funds will then go onto a sanctioned destination, will be penalized. And some of the penalties have been sizeable. France’s largest bank, BNP Paribas, was fined almost $9 billion in 2014 for contravening sanctions against Sudan, Cuba and Iran. It was also banned from carrying out certain US dollar transactions for a year. Standard Chartered bank also received a hefty fine in 2012 – paying US authorities $667 million – in a settlement with regards to circumventing restrictions on dealing with Iran.
In order for sanctions to be effective and have real political clout, loopholes have to be closed, and that is what regulators have been doing recently. After all, banks have a conflict of interest a lot of the time when the law dictates that they can’t serve customers that they would like to do business with. That’s why regulators have had to clamp down on banks’ activities and close those loopholes that were obviously being exploited.
After 9/11, banks made a lot of noise about managing risk and reputation. What emerged around 2010-2012 however, was that while banks had cleaned up their act in company headquarters, things were going unchecked in their branches. Now regulators are demanding that company culture has to change across the board, from HQ through to every branch in an organisation.
If a bank is found to have breached the spirit of the law regarding sanctions, the regulators move in. Literally. Banks are not just fined, but also put under close surveillance, with corporate monitoring firms mandated by the regulators coming onsite to oversee change, ensure that it is happening and that the necessary deep cultural changes occur. The bank’s activities and transactions will be closely monitored for at least a couple of years.
So, banks are held liable for their actions, but it doesn’t stop there: regulators have increased personal liability as well, spreading the liability across the C-suite. Compliance officers are also held personally liable and could end up in jail if found guilty of contravening the law.
This shift has brought about a sea change in the way that compliance officers operate, precipitating this new wave of enhanced professionalism from within as well as externally. There are only a handful of top compliance officers in the world but they are in high demand right now, often being parachuted in to sort out organisations under the spotlight. As they are personally liable, they have a hugely vested interest in ensuring compliance is within the spirit of the law and not just in HQ, but in all branches of an organisation.
This new type of souped up compliance officer is highly empowered by the board, but under a lot of pressure to get it right. As a result, there has been a trend towards centralization and monitoring from their base in HQ. Compliance officers want to have all the data that shows financial flows across the organisation, including between branches – thus ensuring u-turn transactions are not taking place, for example. Since they are held personally liable, they want to know that everything is in good order by monitoring all the data related to the compliance policy and manage it from a central point
It is much easier for compliance officers to control and communicate everything now because their status has shot up with the increased focus on compliance. Whereas once they were just a subsidiary function, they are now a pivotal part of the leadership team. They may not be contributing to profits in the same way that say the marketing team or the sales team do, but they can certainly protect profits, which is just as important now. This shift has put compliance officers on equal footing with other functions on the leadership team. Think of the $9 billion fine imposed on BNP Paribas – that sum is more than the company’s annual profits. That is a bill that no company wants to have to pay.
This increased significance of compliance has made it much more central to overall business objectives. Customers, banking correspondents, business partners, shareholders – they now want to know about compliance and whether or not an organisation follows due diligence. Compliance is now an integral part of how a business operates, where it operates and who it operates with. It has come of age and is enjoying having a real seat at the top table.
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