Widespread Inadequacies in application of HMT Sanctions

Disappointingly few UK financial services firms meet Financial Services Authority requirements in relation to UK financial sanctions, an FSA report published last week revealed.

Based on the findings of a survey of 228 firms, the report identifies a spectrum of behaviours including failure to check HMT sanctions lists at all, screening names after some services had already been provided, and unwarranted optimism in the assessment of the overall risk of sanctions breaches.

While performance did vary between small, medium and large firms, inadequacies in systems and controls were found in "all size of firms across all financial sectors".

Luckily for the businesses concerned, it is HMT and not the FSA that is responsible for enforcing compliance with the sanctions, enabling the report to impartially identify the performance concerns.  The failings described are diplomatically attributed to misconceptions about the HMT list and acceptable practice rather than wilful non-compliance.

Some of the common misconceptions:

• That the HMT list includes only foreigners, when it in fact includes about 62 UK targets
• That clients referred from other regulated businesses need not be screened
• That standard AML Customer Due Diligence checks implicitly cover sanctions, so there is no need to check the HMT list
• That there is no difference between PEPs and sanctions targets
• That certain businesses were exempt, eg. those providing insurance, or conducting only low-value transactions.

The report also noted the challenges that multinational firms face in reconciling the HMT sanctions with other sanctions regimes.  The US OFAC list published by the US Treasury Department is particularly relevant, as it applies indirectly to UK businesses which, whilst they may not be directly subject to OFAC Regulations, carry out transactions in US Dollars which are covered by OFAC Regulations.  The extent of the enforcement regime also applies to those who transact in other currencies but hold US Dollar correspondent accounts.

Two years into the implementation of the UK’s AML and Terrorist Finance strategy, it seems that there is some way to go not just in enforcing compliance at the margins, but addressing a fundamental and widespread misunderstanding of what HMT financial sanctions are all about.

Read the FSA Report
Coverage in The Times Business section
HMT Financial Sanctions page

Free and premium tools for searching HMT and other sanctions lists are available through the KYC360° website:  EDD360° searches HMT, US OFAC and other lists; RiskScreen searches the US OFAC list for free.

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