Key messages
The FCA has set out the actions that it expects firms to take and warned that where it identifies issues with firms' systems and controls, feedback will be provided and, in some circumstances, regulatory tools are being used to have firms remedy issues. These will include the use of independent skilled persons interventions, imposing business restrictions on firms and enforcement action where serious misconduct is identified.
In this piece, the FCA highlights what work it's completed alongside the Office of Financial Sanctions Implementation (OFSI) and Professional Body Supervisors (PSBs), to ensure awareness and compliance with relevant sanctions. It also details examples of good practice and areas for improvement, using its Sanctions Screening Tool. The Tool was developed to objectively test how effective firms were at identifying and entities using test data.
Findings from FCA Thematic Work
Across its assessment of over 90 firms, the FCA highlights the following as areas of good practice it has observed:
- Firms that took a proactive approach to assessing their exposure to Russia in advance of its invasion of Ukraine were in a better place to meet the resulting demands of sanctions.
- Firms that could articulate and show how their sanction screening tools were calibrated for their business risk were able to show their effectiveness in complying with sanctions.
- Most firms were able to show they had "fuzzy" logic built into their systems to identify name variations for sanctioned entities and individuals.
The FCA also identified several areas of improvement for authorised firms:
- Senior Managers require sufficient MI in order to discharge their responsibilities appropriately, and must be sufficiently aware of any risk of breaching sanctions the business faces. The FCA will look to these senior managers and Senior Management Function holders (SMFs) to have oversight of the firms systems and controls to ensure compliance with UK sanctions.
- Some global firms were not aligned with the UK sanctions regime, with an over-focus on US sanctions.
- There were instances where firms were over-reliant on third-party tools, leading to lack of understanding of the outputs from these tools and poor calibration on the business risks to which the business should be alive, as well as a lack of checking being conducted against updated OFSI lists.
- Firms that did not conduct any horizon scanning before the invasion found it difficult to introduce risk reducing measures such as enhancing escalation policies and suspending payments to/from Russia.
- The FCA noted a lack of resourcing in some firms led to a backlog of KYC and CDD checks, and in cases inadequate checks being completed. The FCA expects firms to maintain effective screening processes, able to trigger alerts for any and all OFSI listed individuals and entities.
- Some firms are not sufficiently reporting to the OFSI sufficiently, with the FCA noting that some firms wait weeks or months before reporting genuine hits, with some failing to report altogether. The FCA reminds firms that there is an expectation to notify the OFSI and FCA where a firm know or has reasonable cause to suspect a breach of financial sanctions.
The FCA is now working closely with PSBs to raise awareness of sanctions, through the Office for Professional Body Anti-Money Laundering Supervision (OBPAS). By encouraging PBSs' to undertake targeted sanctions work, thematic projects and data collection, the FCA is working to ensure professional bodies and their constituents remain compliance with the UK sanctions regime.
Call to action by the FCA
The FCA has reminded firms that they must take the following actions:
- Firms should continue to evaluate their approach to identifying and assessing the sanctions risks to which they are exposed.
- They should actively strengthen their measures to prevent sanctions breaches and evasion, adapting to the evolving sanctions landscape and changing risk exposures, to ensure that control frameworks remain effective and aligned with the current requirements.
- Firms should read the FCA Financial Crime Guide (in particular Chapter 7), and SYSC 6.3 of the Handbook, to understand their responsibilities under the Money Laundering Regulations (MLRs) and expectation of compliance with all UK regimes under the Sanctions and Anti-Money Laundering Act 2018, including the Russia (Sanctions) (EU Exit) Regulations 2019 (as amended) and relevant guidance such as OFSI UK Financial Sanctions: general guidance and the JMLSG guidance.
As next steps, you should also:
- Consider how the FCA's findings could be applicable to your firm’s sanctions systems and controls and take steps to address where appropriate.
- See the FCA's Sanctions webpages; these pages include the latest updates and details on how to report sanctions breaches to us.
- Be prepared to engage with FCA about its testing of firms’ sanctions screening systems and controls.
