PragmaticStrategiestoManageSanctionsComplianceRisk

JoelAmy,B.Sc.,LL.B.,CAMSSVPFinancialCrimeCompliance&

ChiefAMLOfficer,CanadaMacquarieGroup

SessionOverviewThissessionisorganizedintothefollowingparts:

• Generaloverviewofsanctionsmeasures,includingwhattheyare,whyandhowthey’reapplied,andoutliningkeyprinciples

• Identificationofsanctionsrisktriggersrelatedtoclients,counterpartiesandtransactions,thatcouldpotentiallyexposeyourinstitutiontosanctionsviolations

• Interactivecasestudiestoassistinapplyingyourknowledge

• ConsiderationofhottopicsinCanadianandU.S.sanctionsmeasures

• Financial institutions have faced significant fines and penalties for sanctions violations over the past few years. Some of the more recent and larger fines include:

• And these fines do not reflect the complete picture, there is still:§ Cost of remediation§ Reputational damage§ Personal liability for individuals

The costs of getting it wrong are significant…

SanctionsOverview

WHAT are sanctions?

Legislation, regulation or other binding instruments that prohibit or restrict dealing with certain countries, governments, groups, entities or individuals.

WHO makes them?

Multinational bodies and national governments, including the United Nations, the European Union, Canada, the United States and the United Kingdom, among others. All UN member states are obliged to implement United Nations Security Council (UNSC) sanctions domestically.

WHY are they implemented?Sanctions are aimed at deterring threats to international peace and security and bringing about a change in the policy or activity of the targeted country, government, entity or individual.

Howaresanctionsapplied?

Comprehensive country sanctions – prohibit nearly all activity with the sanctioned country and persons in that country, including its government, government controlled entities, nationals and private companies

List based sanctions – target named individuals, entities or vessels and usually prohibit all activity with the sanctions target. Such targets are referred to as Specially Designated Nationals (SDNs) under U.S. sanctions and Designated or Listed Persons under other sanctions programs

Sectoral sanctions – prohibit specific activity involving a targeted sector or group within a country or region. For example, current Canadian, U.S. and E.U. sanctions against Russia target its finance, energy and defencesectors

Sanctions programs vary by country and situation but will typically fall into one or more of the three categories below:

SomeKeyPrinciples

Any entity that is 50% or more owned or controlled by one or more sanctioned person is also considered sanctioned without having to be specifically named in any sanctions list

Sanctions can have extra-territorial application, i.e. apply outside the country that implements them. For example, they apply to citizens and residents wherever located and to transactions in the currency of the implementing country. In some cases sanctions can also be made to apply to foreign persons.

Sanctions can be breached by directly engaging with a sanctioned person or entity or undertaking prohibited activity (direct sanctions risk) OR by facilitating client activity prohibited by sanctions measures (indirect sanctions risk)

RelevantSanctionsRegimes

Domestic Local Global?Within Canada and abroad In the countries in which

your institution operates or conducts business

With the sanctions programs of certain key jurisdictions(i.e. US, EU, UK)

Pragmaticriskmanagementrequiresyourcomplianceframeworktoconsidervarioussanctionsregimes

CanadianSanctions• TheCanadiansanctionsregimeisoverseenby

byGlobalAffairsCanadaandisenacteddomesticallyunderthefollowingpiecesoflegislation:

- UnitedNationsAct- SpecialEconomicMeasuresAct- FreezingAssetsofCorruptForeignOfficialsAct- ExportandImportsPermitsAct- ImmigrationandRefugeeProtectionAct- CriminalCode

• TheadministrationofCanadiansanctionsiscomplicatedandinvolvesGlobalAffairsCanada,DepartmentofJustice,RCMP,CBSA,OSFI,IIROC,CSIS,Immigration,RefugeesandCitizenshipCanada(IRCC)andDepartmentofFinance

• CanadiansanctionsapplytoallpersonsinCanadaandallCanadiansoutsideCanada,includinglegalentitiesformedunderthelawsofCanadaoraprovince

CanadianSanctions:MinisterialDirectivePower

• WhilenottechnicallyconsideredpartoftheCanadiansanctionsregime,PCMLTFAamendmentsthatcameintoforcein2014provideauthoritytotheMinisterofFinancetoissuedirectiveswhichcouldhavesimilareffect

• TheMinisterhasnotyetexercisedthisauthority,butitallowshimorher:

(i) toissuewrittendirectivesthatrequirereportingentitiesunderthePCMLTFAtoapply“countermeasures”totransactionsoriginatingfromordestinedtodesignatedforeignjurisdictionsandentities; and

(ii) inthemostseriouscases,torecommend,inconsultationwiththeMinisterofGlobalAffairs,issuingregulationsunderthePCMLTFAlimitingorprohibitingreportingentitiesfromenteringintoafinancialtransactionoriginatingfromordestinedtodesignatedforeignjurisdictionsandentities.

CanadianSanctions:MinisterialDirectivePower

• TheMinisterofFinancemayonlyissueadirectiveif:

(i) aninternationalbodyororganizationhascalledonitsmemberstotakemeasuresonthegroundsthattheforeignjurisdictionorentity’sAMLorCTFmeasuresareineffectiveorinsufficient

OR

(ii) theMinisterisoftheopinionthattheineffectivenessorinsufficiencyofthejurisdictionorentity’sAMLorCTFmeasurescouldcauseanadverseimpactorreputationalrisktotheintegrityofCanada’sfinancialsystem

• ThetextofanydirectivewouldbecommunicatedbyFINTRACandalsopublishedintheCanadaGazette.Thedateuponwhichadirectivewouldcomeintoforcewouldbespecifiedinthedirective.Directivesremaininforceuntilofficiallyrevoked,suspendedoramended.

U.S.Sanctions:WhatisOFAC?

• TheOfficeofForeignAssetsControl(OFAC)– anagencyoftheU.S.DepartmentofTreasuryresponsibleforadministeringandenforcingU.S.sanctionsmeasures

• OFACexercisesbroadjurisdictionoverpersonsandactivitiesinexecutingitsmandatetoenforceapplicableU.S.sanctionsmeasures.OFACiswellfundedandzealousinitsenforcementactivities.

• U.S.sanctionsmeasuresapplyto“U.S.Persons”,U.S.-origingoods,andU.S.connectedtransactionsandactivities

U.S.JurisdictionalHooks:Whatisa“U.S.Person”?

• “U.S.Persons”include:

• U.S.citizensandpermanentresidentsworldwide(i.e.regardlessofwhetherresidingintheU.S.)

• AllindividualsphysicallylocatedintheUnitedStates,regardlessofcitizenship

• LegalentitiesdomiciledintheUnitedStates(e.g.corporations,partnerships,etc.),includingU.S.branchesandofficesofnon-U.S.banks

• Non-U.S.branchesofU.S.banks• Incertaincases,non-U.S.entitiesthatareU.S.ownedorcontrolled

U.S.JurisdictionalHooks:U.S.connectedactivities

• EvenifyouareNOTaU.S.person,U.S.sanctionswillapplytoyouractivitiesiftheyareconnectedtotheU.S.,including:

• allUSDdenominatedtransactionsandpayments• transactionsoractivitiesinvolvingU.S.-origingoods• transactionsoractivitiesto,fromorthroughtheUnitedStates

CountrySanctionsPrograms

• Iran• North Korea• Sudan• Syria• Cuba• Crimea

Comprehensive Sanctions

• Afghanistan• Belarus• Burma (Myanmar)• Burundi• Central African

Republic• DR Congo• Egypt• Eritrea• Iraq• Lebanon• Libya• Republic of Guinea• Republic of Guinea-

Bissau• Somalia• South Sudan• Tunisia• Ukraine• Venezuela• Yemen• Zimbabwe

Targeted Sanctions

• Russia

Sectoral

RiskTriggers

PositiveScreeningMatches

Whattolookfor?Matchesagainsttheclient,counterparty,vesselorarelatedpartythatcannotbediscounted

Matchesinvolvingpreviouslysanctionedpersonsorentities

Vesselscallingatportsincomprehensivelysanctionedjurisdictions

Wheretolook?

Sanctionsoradversenewsscreeningresults

OwnershipStructure

Shareholder,UBOorcontrolleroftheclient,counterpartyorvesselis:

vsanctioned;or

vincorporated,domiciledorlocatedinacomprehensivelysanctionedjurisdictionorajurisdictionsubjecttosectoralsanctions

The%shareholdingisirrelevant

• Sanctionsoradversenewsscreeningresults

• Shareholders/directorsregisters

• Financialstatementsorothercontinuousdisclosure

• Dunn&Bradstreetreports(orsimilar)• Yourfirm’sinternalcountryrisklist

CommercialorEconomicTies

Clientorcounterpartyhasoperations,customers,suppliers,agents,subsidiaries,branches,JV’s,investmentsorotherassetsincomprehensivelysanctionedcountriesorcountriessubjecttosectoralsanctions

• Financialstatements,continuousdisclosure,clientwebsite,pressreleases,Dunn&Bradstreetreports(orsimilar),etc.

AlsobeawareofWhereacombinationofthefollowingrisktriggersisidentifiedinrelationtoaclientorcounterparty,youshouldbealerttothepresenceofanydirectlinkstosanctionedcountriesorpersons,thatwouldwarrantfurtherinvestigation:

NeighbouringCountries

Clientorcounterpartycarriesonbusinessincountriesneighbouringcomprehensivelysanctionedjurisdictions

Example

CountriesneighbouringIranincludeTurkey,Azerbaijan,UAEandotherGulfStates

Wheretolook?

Financialstatements,continuousdisclosure,clientwebsite,Dunn&Bradstreetreports(orsimilar)etc.

CountrieswithCommercialties HigherRiskActivities

Clientorcounterpartyisincorporatedinacountrywithknowncommercialtiestocomprehensivelysanctionedcountries

Clientorcounterpartyisinvolvedinsectorsoractivitiesconsideredhigherriskfromasanctionsperspective

Example ExampleCountrieswithknowncommercialtiestoIran,include:• Turkey,UAEandotherGulfstates• China,India• EUcountrieslikeGermany,

Greece,Italy,AustriaandSwitzerland

• Energy(oil&gas)

• Defence• Commoditytraders• Shipping

Wheretolook?Wheretolook?

Financialstatements,continuousdisclosure,clientwebsite,Dunn&Bradstreetreports(orsimilar)etc.

Financialstatements,continuousdisclosure,clientwebsite,Dunn&Bradstreetreports(orsimilar)etc.

IdentifyingRiskTriggers:CaseStudy1

Yourfirm’scommoditiestradingdeskrequestsyoutoon-boardanewclient,HappyRainbowTrading(HRT).YouestablishthecompanyisaprivatelyownedoilrefinerylocatedinIndia.Afterreviewingthecompany’sfinancialstatementsandwebsite,youidentifythatthecompanyimportscertainamountsofcrudeoilfromtheNationalIranianOilCompany(NIOC).

PollQuestion1:

Whichofthefollowingisasanctionsrisktriggerthatwarrantsfurtherassessment:

(a) Thecompanyisprivatelyownedandhasasuspiciousname;(b) ThecompanyoperatesanoilrefineryinIndia;(c) ThecompanyimportscrudeoilfromNIOC;(d) Both(b)&(c)

IdentifyingRiskTriggers:CaseStudy1

WhileestablishingtheownershipstructureofHRTyouidentifythatRuvOil,aRussianstate-ownedoilcompany,isintheprocessofacquiringa51%shareholdinginHRT.YoufurtherestablishfromscreeningthatRuvOil isasanctionedentity.

PollQuestion2:

DoesthependingacquisitionbyRuvOil presentsanctionsriskexposuretoyourfirm?

(a) Yes(b) No

PollQuestion3:

WouldyouranswerchangeifRuvOil wasNOTasanctionedentity?

(a) Yes(b) No

IdentifyingRiskTriggers:CaseStudy2

Your firm’slendingbusinesswantstoextend aUSDloantoaGermanbasedcompanywith officesinBerlin andNewYork. Youdiscoverthata portionoftheloan maybe usedtofulfil acontractthecompany hasbeenawardedtoprovideenergymeterstoa utilitycompanyownedbytheIraniangovernment.The Germancompany’sEUlegalcounselhasconfirmedinwritingthat fulfillingthecontractwouldnotviolateEUsanctions.

PollQuestion4:

CitingtheEUlegalcounseladvice,andthefactthatthecompanyisbasedinGermany,yourinternalbusinesscontactadvisesthetransactionisgoodtogofromasanctionsriskperspective.

Doyouagree?

(a) Yes(b) No

IdentifyingRiskTriggers:CaseStudy3

Yourfirm’sinvestmentfundsdivisionwantstoon-boardaEuropean-basedcompanyasaninvestorintooneofitsfunds.Whileascertainingthecompany’sownershipstructure,youestablishitisusedasaprivateinvestmentvehicleforaRussianoligarch,whoholdsa30%interestinthecompany.YouconductscreeningonthisbeneficialownerandidentifythatheissanctionedbyOFAC.

PollQuestion5:

YourcontactinthebusinesssaysthatbecausetheRussianoligarch’sshareholdingiswellbelowthe50%threshold,youshouldnotbeconcernedfromasanctionsperspective.

Doyouagree?

(a) Yes(b) No

LookingForward:CanadianSanctions

• InApril2017,aCanadianSenateCommittee– theStandingCommitteeonForeignAffairsandInternationalDevelopment– publisheditsreportentitled,“ACoherentandEffectiveApproachtoCanada’sSanctionsRegimes:SergeiMagnitsky andBeyond”

• ThereportwastheculminationoftheSenate’smandatedreviewoftheFreezingAssetsofCorruptForeignOfficialsActandtheSpecialEconomicMeasuresAct

• Thereviewwasconductedvia15meetingswithsworntestimonyprovidedby42individuals,includingprofessors,industrypractitioners,regulators,lawenforcement,borderservices,citizenship&immigration,amongothers

LookingForward:CanadianSanctions

• Thereportsetout13recommendationstotheGovernmentofCanadatoimprovetheCanadiansanctionsregime,includingto:

• ensurethedifferentpiecesofCanadiansanctionslegislationoperateinacomplementaryandcoherentmanner

• providecomprehensive,publiclyavailablewrittenguidanceonsanctionscompliance

• createaconsolidatedCanadiansanctionslist

• ThereportstoppedshortofformallyrecommendingthecreationofaseparateagencytohandletheadministrationandenforcementofCanadiansanctionsmeasures(akintoOFAC),butitdidrecommendtheGovernment,“shouldproperlyresourceandreformthestructuresresponsibleforitssanctionsregime”andstatedthat:

“[T]heimplementationofsanctionsmeasures– andbyextensiontheeffectivenessofCanada’ssanctionsregimes– canbegreatlyimprovedbyrecognizingtheneedtocreateadedicatedsectionthatactsasadomesticregulatorforsanctionsmeasures…”

LookingForward:CanadianSanctions

• NewdraftsanctionsagainstIrancurrentlymakingitswaythroughtheSenate(CommitteereportpresentedonApril4,2017):

• “[whiletheadoptionoftheJCPOA]callsforthescalingbackofnuclearrelatedsanctionsagainstIran,terrorismandhumanrightsviolationsemanatingfromIrancontinuetooccurandsanctionstodetersuchconductmustbestrengthenedandmaintained”

Lookingforward:U.S.Sanctions

• Russia

• Despitepre-inaugurationconcernsthattheTrumpadministrationwouldeasesanctionsagainstRussiaunilaterally,theE.U.andU.S.havesincereconfirmedanyeasingofsanctionsagainstRussiaisdependentonitsfullimplementationoftheMinskagreementsanditswithdrawalofsupportforseparatistsinUkraine

• AsconfirmationofcontinuedU.S.stanceonRussiasanctions,theU.S.recentlydeniedExxonMobil’sapplicationforwaiverfromU.S.sanctions.ExxonMobilhadbeenseekingtoresumeanoilventurewithalargeRussianconglomerateclosetoRussianPresidentVladimirPutin

Lookingforward:U.S.Sanctions

• Iran

• JointComprehensivePlanofAction(JCPOA)wasagreementamongIran,P5+1andE.U.concerningIran’snuclearprogramandeasingsanctions

• EvenafterotherjurisdictionseasedIraniansanctionsafterJCPOAImplementationDayonJanuary16,2016,OFAC’sprimarysanctionsandU.S.exportcontrolregulationscontinuedtoapplytoanyIran-relatedtransactionsinvolvingU.S.nexus

• PresidentTrumphadharshcriticismoftheJCPOAduringhiscampaign,callingit“theworstdealevernegotiated”

• OnApril18,2017,theU.S.StateDept.certifiedtoCongressthatIranwasincompliancewithitsobligationsundertheJCPOA,butthatIranremainedaleadingstatesponsorofterrorandtheU.S.wouldreviewitsinvolvementintheJCPOA

• AsofMay3,2017,theU.S.SenateForeignRelationsCommitteewaspushingthroughabillforadditionalsanctionsagainstIranforthedevelopmentanduseofballisticweapons,supportforterrorismandhumanrightsviolations

Lookingforward:U.S.Sanctions

• NorthKorea(DPRK)

• TensionbetweentheU.S.andDPRKhassteadilyescalatedsincePresidentTrumpassumedofficeonJanuary20,2017

• DPRKhassincefiredseveralmissilesinviolationofexistingUNsanctions

• InApril2017,PresidentTrumpdeclaredthattheU.S.wouldbewillingtogoitalonetorestrainNorthKorea’snuclearweaponsprogram

• InMay2017,PresidentTrumpcalledKimJong-Una“smartcookie”andstatedhewouldbe“honored”tomeetwithhimundertherightcircumstances

• OnMay3,2017,SecretaryofStateRexTillerson saidtheU.S.wasworkingonmoresanctionstargetingDPRKdependingonitsactions

Lookingforward:U.S.Sanctions

• Venezuela

• TheU.S.hasexistingsanctionsmeasuresagainstVenezuelatargetingindividualsfordrugtraffickingandhumanrightsviolationsresultingfromanti-governmentprotestsin2014,aswellasagainstcertainsanctionsagainststateownedoilcompanyPDVSAovertradewithIran

• OnMay3,2017,VenezuelanPresidentNicolasMaduroannouncedhewouldseektorewritethecountry’sconstitution– criticshavecondemnedthemoveasa“powergrab”andtheU.S.announceditmayconsidernewsanctionsinresponse

Conclusion&Takeaways

• Sanctionsmeasureswillcontinueintotheforeseeablefutureasatoolusedbygovernmentstopursuevariousforeignpolicyobjectives

• Stayabreastofinternationalpoliticaldevelopmentstoassistinanticipatingpotentialgeographicandothertargetsoffuturesanctionsmeasures

• Formallyincludesanctionsriskaspartofyourfirm’sinherentriskassessmentprocess

• Integratesanctionscompliancemeasuresintoyourbroaderfinancialcrimecompliancemanagementframework,includingviatraining,creationandmaintenanceofaninternalcountryrisklistandaspartofinitialonboardingandongoingmonitoringprocesses

Questions?

JoelAmy,B.Sc.,LL.B.,CAMSSVPFinancialCrimeCompliance&

ChiefAMLOfficer,CanadaMacquarieGroup