The world has experienced some unprecedented sanctions being imposed by countries around the world in response to the Ukrainian/Russian conflict.
The strategy is clear: cut off financial supplies, freeze assets, prevent the flow of international goods and services, and prohibit access to capital markets.
What is less clear, however, are the murky relationships surrounding some non-sanctioned individuals and entities. Checking ultimate beneficial ownership (UBO) of counterparty banks is a cornerstone of any due diligence process – but what about checking the networks surrounding owners?
In a time of surging sanctions activity, the risk of indirect exposure to sanctioned parties significantly increases. For banks doing business around the world, a simple UBO check on a counterparty may not throw up any red flags – but someone who has been sanctioned is unlikely to keep their name listed on ownership documents. Instead, they will often use complex networks of connections to retain their wealth while staying under the radar of sanctions compliance professionals.
The current landscape shows just how rapidly the status of an individual or business can change. Banks who have held long-standing counterparty relationships may find themselves unsure of whether they can, or how they should, continue to do business with certain parties in times of surging sanctions.
The ability to unwrap complex ownership structures is key to avoiding indirect sanctions exposure – so carrying out enhanced due diligence checks is more important than ever. Carrying out deep web searches and even social media checks should be considered.
Many banks and businesses will today be looking at their overall financial crime compliance programs in the context of rapid change and considering whether their policies and processes are fit for purpose. Could this period of activity act as a catalyst for KYC transformation?
Now may be the time to assess and test your Know Your Customer (KYC) processes – are you conducting checks beyond what is commonly available? Are you diving deep enough to uncover connections which might not be obvious at first glance? And are you considering the risks associated with payment channels outside of the SWIFT network, as is now the case with Russia?
If you need any help assessing or transforming your counterparty KYC programs, reach out to one of our experts.