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Financial Sanctions: Identifying and Mitigating Risks in the Financial Sector
Institutions Must Assess and Manage Risks Associated with Financial Sanctions to Avoid Breaches and Circumvention
In light of recent international developments, financial institutions are under increased pressure to identify and mitigate risks associated with financial sanctions. The Estonian Financial Supervision Authority (Finantsinspektsioon) has issued guidelines for assessing these risks, which have been adopted by the financial sector.
Risk Categories
The guidelines outline five risk categories that institutions must assess when dealing with financial sanctions:
- Client-related risks: Sophisticated ownership and management structures can pose higher risks of financial sanctions.
- Product, service or transaction-related risks: Institutions must assess the risks associated with specific products, services, or transactions.
- Geographical risks: Transactions involving high-risk countries or regions may pose a higher risk of financial sanction breaches.
- Technology-related risks: Automated screening tools (ASTs) and other technologies used to identify sanctioned individuals or entities must be assessed for their capabilities and potential manipulation.
- Financial sanction risks: Institutions must assess the inherent risk, efficiency of risk management measures, and residual risk associated with each transaction.
Risk Assessment and Mitigation
Institutions must conduct a separate risk assessment for money laundering, terrorist financing, and financial sanctions, including proliferation of weapons of mass destruction. The risk assessment will determine the institution’s risk appetite, which will guide the development of a risk mitigation and management system.
The guidelines emphasize the importance of establishing a written risk mitigation and management system that includes:
- A risk mitigation and management strategy
- Establishment and updating of risk appetite and risk assessment
- Rules of procedure for risk management and mitigation
- Designation of responsible persons and determination of their responsibilities
- Implementation of an appropriate training program
- Control measures to manage the risk, including due diligence
Conclusion
Institutions must take a proactive approach to identifying and mitigating risks associated with financial sanctions to avoid breaches and circumvention. By conducting thorough risk assessments and establishing effective risk mitigation and management systems, institutions can ensure compliance with international sanctions and maintain their reputation in the financial sector.
Key Takeaways
- Financial institutions must assess client-related, product/service/transaction-related, geographical, technology-related, and financial sanction risks.
- Institutions must conduct separate risk assessments for money laundering, terrorist financing, and financial sanctions.
- The risk assessment will determine the institution’s risk appetite, which will guide the development of a risk mitigation and management system.
- A written risk mitigation and management system is essential to ensure compliance with international sanctions.