GS interviews LexisNexis Risk Solutions' Vincent Gaudel

Vincent Gaudel, financial crime compliance expert for LexisNexis Risk Solutions recently shared his views on thematic sanctions with The Green Sheet. Following is the resulting Q&A covering the distinction between thematic sanctions and traditional country-based sanctions, what types of financial crimes that typically lead to imposition of thematic sanctions, how thematic sanctions affect financial institutions' compliance obligations, and more:

What distinguishes thematic sanctions from traditional country-based sanctions, and why are they considered a more effective tool for addressing financial crimes?

Thematic sanctions, also known as ‘horizontal’ sanctions, have emerged as a more suitable foreign policy tool for responding to global issues. Implementing thematic sanctions offers two main advantages.

They provide greater flexibility and effectiveness when implementing sanctions on global concerns identified as significant foreign policy issues. For instance, if a country identifies promoting human rights and the rule of law as a general foreign policy objective, equipping itself with a global sanctions program makes sense.

This program enables authorities to designate individuals and entities that undermine that objective, regardless of their location. A thematic program allows for a swift response to issues as they arise because it doesn’t require enacting a country-specific legal instrument.

Thematic sanctions also enable a more targeted impact and limit unintended consequences for countries and ordinary citizens. Often, even country-based programs limit themselves to targeting specific individuals and entities. However, when a country-based program is implemented, banks and corporations may extend scrutiny to all persons and entities connected to that country, leading to de-risking decisions that disrupt relationships with sanctioned countries.

Can you explain the types of financial crimes that typically lead to the imposition of thematic sanctions?

Regulators implement thematic sanctions in response to global issues rather than specific types of financial crimes. These programs initially emerged to counter the global threat posed by terrorist groups. To date, thematic sanctions programs address issues such as terrorism, human rights abuses, corruption, cybercrime and chemical weapons proliferation.

The US, through the Office of Foreign Assets Control (OFAC), remains the most prolific issuer of thematic sanctions, implementing programs related to narcotics trafficking, transnational criminal organizations, hostage situations, wrongful detention of U.S. nationals and foreign interference in U.S. elections.

How do thematic sanctions affect financial institutions' compliance obligations, and what steps can they take to ensure they are not inadvertently engaging with sanctioned individuals or entities?

The global nature of thematic sanctions means that no country or region remains immune to sanctions risk exposure. Sanctioned targets can be located anywhere, even in countries perceived as low risk or not targeted by country-specific sanctions.

Compliance obligations remain identical to those of similar sanctions regimes. Businesses bear strict liability to ensure they do not engage in prohibited dealings with sanctioned entities. This requires robust and effective screening controls for all third parties, including direct customers, suppliers, agents, intermediaries and their parent and beneficial owners. While the nature of compliance obligations remains the same, the global reach of thematic sanctions expands the exposure to sanctions risks.

What role do governments and international organizations play in coordinating thematic sanctions, and how do these efforts influence global financial crime prevention?

International coordination varies depending on the issue. On terrorism, there is established international alignment through UN Security Council Resolutions. UN thematic sanctions possess the most effectiveness due to their binding nature on all UN-member states.

Most thematic sanctions, however, are implemented at national or regional level, such as in the EU. Unilateral measures naturally have a more limited reach compared to multilateral ones. Even when several countries share concerns over a global issue and implement thematic sanctions programs, alignment across states remains limited in terms of the scale of designations and the nature of targeted persons and entities.

Despite their unilateral nature, sanctions imposed by the OFAC often pose significant risks and are strictly complied with globally, even outside the U.S. jurisdictional reach.

How can businesses operating in global markets navigate the complexities of thematic sanctions while avoiding penalties and minimizing operational disruptions?

Given the increasing use of sanctions by governments and international organizations and the strict liability for businesses to comply, implementing sanctions compliance programs becomes crucial.

Sanctions screening controls play a critical role in these compliance programs, enabling global businesses to detect and manage sanctions risk exposure effectively. Integrating complete, accurate and timely sanctions list data into third-party relationship management systems is essential. Businesses must secure customer and third-party onboarding and monitor existing relationships continuously.

For businesses processing payments or financial transactions, the importance of sanctions compliance extends beyond institutional business relationships. Companies must check whether they process transactions to, from or through sanctioned entities or countries in real-time. This requirement poses unique challenges for payment processing activities, especially with the acceleration of payment systems, even though specific rules may apply.

What are the most common challenges that regulators and financial institutions face in enforcing and complying with thematic sanctions, and how can these challenges be addressed?

Sanctions compliance challenges, particularly those related to screening controls, include the timely implementation of sanctions measures. The high time-sensitivity in sanctions compliance demands that financial institutions and businesses comply "without delay," as targets on publicly available sanctions lists may attempt to move assets beyond regulatory reach.

This requirement results in significant operational challenges, especially for global financial institutions processing millions of transactions daily. Optimizing the end-to-end process - from updating sanctions lists to decision-making on screening alerts - becomes crucial. Advanced technologies and screening capabilities are necessary to comply with regulatory expectations.

Identifying entities owned or controlled by sanctions targets poses another challenge. Sanctions affect more than just individuals and entities named in official lists. Entities owned 50% or more or even controlled by sanctioned persons (as in the UK or EU), also fall under sanctions.

For a single record on an official list, dozens of indirectly sanctioned entities may exist. Businesses must establish complete ownership and control structures for their legal entity customers to ensure none of the individuals with significant ownership or control are sanctioned.

Specialized vendors maintain proprietary databases of entities owned or controlled by sanctions targets. While these databases can improve sanctions risk coverage, they may not be comprehensive due to difficulties accessing ownership information for entities in certain jurisdictions.

Implementing screening tools must balance effectiveness and efficiency. The primary dilemma in implementing sanctions screening controls lies in meeting the strict liability requirement to catch all sanctioned persons while limiting operational inefficiencies caused by false positives. Fuzzy matching tools, commonly used to catch partial name correspondences, must be tuned to align with an institution's risk appetite.

Advanced capabilities to assess match likelihood or expedite match review identical to previously cleared ones streamline processes. Due to high regulatory sensitivity, screening programs require ongoing testing and auditing. There is increasing scrutiny from regulators for validating that screening controls are both designed adequately, in light of the institution's risk exposure), and operating effectively, as designed.

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