The rise of the sanctions busters

Noise around sanctions and the implications of sanctions breaches has been deafening this year – 2012 has already seen enormous attention focused on HSBC and Standard Chartered for reported sanctions breaches, with other cases murmuring in the background.

The remedial work required by the banks in the aftermath of enforcement will reverberate in the financial sector for a while longer. Add to that the efforts of ‘sanctions busters’ –  a term used to describe those who trade through sanctioned entities and jurisdictions – who are looking for weaknesses in banking systems and regulations to circumvent sanctions and place financial institutions at risk of breaking the law and sanctions will remain a key focus area for compliance teams in Asian financial services into the next few years.

Think like a sanctions buster

Bolstering internal sanctions programs in banks requires increased vigilance from compliance teams. An effective way to achieve this is to think like a sanctions buster. If you were trying to make money from illegal trades, how would you target the institutions and instruments needed to get past legal sanctions?

The Manhattan District Attorney’s office has targeted financial institutions who have worked around sanctions in the past. The hard hitting fines imposed upon firms for removing information that would indicate sanctions breaches from wire transfers – or stripping – should have made the ramifications of the practice explicitly clear for financial institutions.

‘U-turn’ transactions were the subject of the HSBC and Standard Chartered sanctions breach allegations. U-turn transactions involving the transfer of funds from a foreign bank that pass through a US financial institution and the transfer out to a second foreign bank were permitted under the US Iranian Transaction Regulations until 2008. This meant that transactions benefiting Iranian entities could be processed by US financial institutions on condition that the payments were initiated off shore by a non-Iranian, foreign bank and only passed through the US financial system en route to another non-Iranian foreign bank. Any u-turn transactions carried out after 2008 were illegal.

Information contained on the SWIFT messaging document accompanying the transactions told the banks whether the transfer fit the U-turn requirements. This year’s big sanctions cases involved accusations of banks stripping the SWIFT documents, or removing the identifying information leading to active participation in sanctions breaches.

Sanctions create opportunities

Weaknesses in regulations are a gift for the sanctions busters, who are unburdened by the spectre of enforcement. They factor the chance of getting caught and losing goods or money into the overall risk picture and take their chances with the law.

Sanctions by their nature create huge opportunities for the criminally minded. A reduced supply of oil or fuel to a country creates a great demand, which increases the value and means there is more money to be made by those willing to break the law. While the United Nations placed sanctions on trade with Serbia and Montenegro in 1991, some saw this as an opportunity to make money by sailing tankers full of oil to the edge of the sanctioned zone in the Adriatic sea, then radioing ashore a message that someone on board was having a heart attack. Apparently, this ruse allowed ships to cross into Serbian waters and deliver their product. One particular sanctions buster seriously lost out in this game, however, as a power plant using his oil was hit by NATO air strikes which left him watching his – as yet unpaid for – oil go up in flames.

Iran, the subject of tight sanctions imposed under the CICADA regime, is the major supplier of oil to India. The two countries have finally settled upon a value transfer system which allows India to pay Iran for its fuel. Iran has agreed to accept 45 per cent of the oil’s value in Indian rupees which is not a freely traded currency and which limits Iran’s purchasing power. The tangible effect of forcing Iran and India out of dollar and euro transactions has reduced Iran’s ability to buy legitimately outside of India. However, as much of India’s economy is cash based and tax evasion is seen as a national pastime, Iran will find out there are plenty of goods it can purchase with its rupees.

Changing legal and regulatory environments are cited as one of the compliance officer’s top priorities and greatest areas of vigilance. The regulatory seal of approval may not always be enough to guarantee your counter-party is doing enough to protect you from a sanctions buster. Financial firms also need to consider to what extent they can rely on the due diligence carried out by third parties.

Sanctions busting in the bank                

Best practice and guidance on how to implement a sanctions program in a financial institution are readily available from consultants, corporate service providers and other interested groups. While the idea of thinking like a ‘sanctions buster’ does seem a good method for identifying weaknesses in your system it is swiftly becoming another area of required specialist knowledge for compliance officers who also have to think like a banker to make compliance a credible part of the business and are already thinking like a money launderer and a terrorist financier.

More hints at red flags for sanctions breaches and practical examinations of how funds related to sanctioned entities and jurisdictions have flowed through the financial system could provide more useful guidance to already over-burdened compliance officers.


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