Understanding your Sanctions exposure in relation to customers, transactions and business is vitally important in today’s fast-paced global economy. The consequences of misunderstanding the risk and allowing funds associated with a sanctioned individual or entity to flow are far-reaching with significant financial and reputational repercussions at stake.
Beyond your sanctions list screening, how do you assess the sanctions risk? One key method is to fully assess the sanctions risk at a ‘country’ level. Knowing whether the possible sanctions risk is significantly higher with countries that your customers operate in, or send funds to, enabling you to determine the appropriate level of monitoring required throughout the relationship. The country risk rating will feed into your customer risk assessment and can flag out where the risk level has potentially increased for a customer.
The sensible approach to understanding sanctions country risk is to identify those countries to which sanctions programmes have been applied – looking at full and partial prohibitions and right down to levels of individuals and entities that have been included on the sanctioned on the lists.
But there is more to consider in relation to sanctions country risk such as:
- Geographical position – is the country under consideration a close neighbour of a sanctioned country, if so the potential risk that funds flowing through it could have originated in the sanctioned country is higher.
- Trade relations – despite the sanctions regime many countries do have trade relations with the prohibited and sanctioned countries. The extent of these trade relations should be taken into account when assessing the risk.
- What is the likelihood of doing business with a sanctioned entity or individual? This can be determined by looking at counts of sanctioned individuals/entities for the country relative to the population. For example, at the time of writing, there are 29 sanctioned names for the British Virgin Islands and a comparable 31 for the Philippines. But given the vast difference in population size, the chance or likelihood of encountering a sanctioned individual/entity in the British Virgin Islands is significantly higher.
The SQA Country Risk Index (CRI) can simplify this risk assessment process by providing a comprehensive country evaluation specifically focused on Sanctions risk. For Sanctions country risk evaluation, SQA recommends inclusion of 8 of 17 key categories within the County Risk Index:
- AML Maturity – this looks at maturity of the regulators and country ratings in relation to AML risk
- Nuclear Proliferation – this looks at specific nuclear-related sanctions which are in use
- Narcotics – this looks at specific narcotics-related sanctions which are in use
- Sanctions Counts – analyses the contents of key sanctions lists
- Sanctions Density – analyses the contents of key sanctions lists relative to population counts
- Sanctions Sensitivity – this covers the details mentioned above such as sanctions programmes in place borders, full and partial prohibitions
- Trade relations with prohibited countries
- Cultural Prohibitions Relationships – looks at cultural associations and sympathies for other countries
Over 20 different data sets are combined to generate a specific sanctions-related risk rating for each country included in the index which can be easily incorporated into internal business processes such as customer risk assessment and ongoing monitoring.
This country evaluation provides a consistent view of the potential Sanctions related country risk, which is repeatable, reusable and evolves from a completely transparent methodology.
The SQA Country Index can also be used to identify countries where the perceived risk from terrorist financing, money laundering and PEPS is higher. These will be covered off in further articles.
For further information about managing country risk, contact SQA Consulting about our Country Risk Index.