How trade sanctions became a compliance headache for SMEs
If they want to stay compliant with increasing sanctions requirements, SMEs in the UK will have to move ‘staying alert to emerging geopolitical issues’ much higher up their to-do lists. The Russian invasion of Ukraine, Chinese spying, fears over a possible invasion of Taiwan and the difficulties of rebuilding supply chains after Brexit have all heightened their vulnerability to global crises and the sanctions which governments use to respond to them.
“SMEs have to expand their geopolitical knowledge if they want to stay ahead,” says Joel Lange, head of Dow Jones Risk and Compliance. “These rules no longer just affect global banks.”
The use of economic sanctions is nothing new, but the sweeping measures imposed against Russia following its invasion of Ukraine in February 2022 seem to mark something of a paradigm shift. This included asset freezes and travel bans for oligarchs, including the then Chelsea FC owner Roman Abramovich, as well as known Putin allies and spokespeople. Russian bank assets in the UK were also frozen, Russian state-owned and key strategic private companies were banned from raising finance in Britain, and trade and export controls were introduced on goods such as military tech and even jewellery.
As of early February 2023, the UK government has sanctioned more than 1,200 people and 120 businesses since the Ukraine invasion began. Unsurprisingly, this has a major knock-on impact on UK businesses.
A growing compliance burden
According to the Financial Conduct Authority, all UK firms are required to comply with these sanction rules, meaning no transactions with – or provision of financial services to – any of the sanctioned entities. That means more screening, to check whether you or your clients (existing or new) interact with people or businesses which appear on the UK’s sanctions list. Failure to abide by the rules could lead to fines from the Office of Financial Sanctions Implementation, or even a prison sentence.
“Due diligence has undoubtedly become more time-consuming, particularly for SMEs with less resources,” says Lange. “There is a need to evaluate not just your own business exposure but also those of suppliers, third parties and agents. Checking names on a list can be straightforward, but it has become very challenging given the sheer volume of names now on there. And even though it may be clear whether you have a direct business link, where do you stand if you are renting a building from a sanctioned individual? Can you pay rent or not? There has been a spike in queries to the regulators around issues such as that.”
In the immediate aftermath of the invasion, the small fintech firm IFX Payments took decisive action to enforce specific controls and freezes on Russian and Belarusian payment routes. “We didn’t have huge amounts of payments to and from Russia and businesses dealing in the rouble, but it was enough to have an impact on the business,” explains Tony Brown, head of compliance and the money-laundering reporting officer at the group.
He adds that 24/7 monitoring of both sanction lists and real-time payments has since led the group to put other countries on a blacklist. “We saw more payments being made in states with close financial Russian ties, such as Moldova and Cyprus. Every single payment was flagged for manual review and couldn’t be released until a compliance person had looked at it. Sanctions are nothing new – but never at this scale, speed or complexity. There are individuals on the lists who would not normally be flagged, plus global businesses linked to Russian payment routes.”
Do you have the right sanctions skills?
Given the growing complexity of sanctions, IFX Payments is training a member of its in-house compliance team to become a sanctions expert.
“The compliance industry has long been focused on anti-money laundering, so there’s a big knowledge gap when it comes to understanding the guts of sanctions,” says Brown. “I’ve seen CVs which say a person has experience of sanctions screening, but there’s a finite number of real sanctions specialists studying global economic and political trends.”
Many SMEs will struggle to fill this gap. “There are certain parts that go into a digger which also go into a GPS-guided missile. Will a digger-maker have to employ an in-house sanctions specialist? They will find that really difficult,” Brown explains.
Even with a sanctions expert, the workload will be onerous for SMEs, Lange adds. “The huge spike in sanctions means that SMEs need to decide whether they have enough resources dealing with sanctions and in dialogue with regulators,” he says.
“They also need to prepare for potentially more sanctions on countries such as China over issues such as the spy balloons,” he continues. “New supply chains and counterparties are also emerging around the world as a result of the Russian invasion and Brexit. You can’t just say ‘We don’t deal directly with Russia or China so we’re fine’ anymore.”
Chrisol Correia, global head of financial crime risk management at risk tech group Facctum Solutions, adds that the situation is only likely to become more complex. “The perception of the risk has grown significantly. Will governments increasingly use this as a geopolitical tool, meaning sanctions lists get bigger and bigger? Do we take the risk of onboarding a client just to offboard them again if the risk profile continues to change?”
Is outsourcing an option for sanctions management?
Although businesses are now expected to have adequate systems and controls to manage sanctions compliance, as well as an individual of sufficient authority to oversee adherence, some SMEs may want to consider using the expertise of third parties, which can often provide specialised data feeds for sanctions screening. “We can aggregate all the data cohesively so our SME customers can check themselves and their suppliers against it,” explains Dow Jones’s Lange.
Crucially, this must be done under the overall control of the SME. Third parties can provide the necessary information, but the final actions or decisions must be made by the SME.
“SMEs are in a difficult situation because they can’t afford the skills they need, but you can’t outsource the overall responsibility and control,” Correia says. “It would be good if they were allowed to make more use of external support and expertise in the decision-making process.”
Brown offers one final consideration: that whoever has control over sanctions compliance within SMEs has to take the ethical side of the matter seriously. “Sanctions aren’t just about oligarchs anymore. It’s about civilians being killed,” he says. “There’s a human face to it.”