Sanction Risks: A Growing Concern in International Business

As global trade continues to expand, companies must navigate a complex web of regulations and sanctions to avoid financial penalties and reputational damage. In this article, we’ll explore the various types of sanction risks that businesses face and how they can mitigate these risks.

Transmission Channel Risk

One significant risk category is transmission channel risk, which refers to the channels used to receive services and products, both in establishing a business relationship and during the course of a relationship. This includes the risk of financial sanctions, particularly when products and services are consumable anonymously, making it difficult for companies to identify the consumers.

• Examples of transmission channel risks include:
  • Using intermediaries or representatives, such as lawyers or agents
  • Relying on third-party service providers with lower international compliance standards

Geographical Risks

Geographical risks are another significant concern, particularly when dealing with high-risk jurisdictions. This includes countries subject to sanctions, as well as those where transactions may be indirectly related to sanctioned regions.

• Key considerations for geographical risks include:
  • Understanding the indirect risks that may arise from transactions involving high-risk jurisdictions
  • Identifying which sanction lists should be screened for all jurisdictions and which lists should be screened for specific countries or regions

Technology-Related Risks

With the increasing use of automated screening tools (ASTs), technology-related risks are becoming a growing concern. Companies must evaluate the capability and manipulation of these technologies to ensure they are effective in identifying sanction risks.

• Key considerations for technology-related risks include:
  • Evaluating the effectiveness of ASTs in identifying sanction risks
  • Ensuring that ASTs are properly configured and maintained

Determining Sanction Risks

To determine sanction risks, companies should follow a methodology similar to that used for money laundering and terrorist financing risk assessments. This includes assessing inherent risk, the efficiency of risk management measures, and residual risk.

• The formula for determining risk characteristic is: Inherent Risk - Efficiency of Risk Management Measures = Residual Risk

Risk Assessment and Mitigation

Companies must prepare a separate risk assessment for sanction risks, including money laundering, terrorist financing, and proliferation of weapons of mass destruction. This assessment should identify the level of residual risk and inform the company’s risk appetite.

• Key components of a sanction risk assessment include:
  • A risk strategy
  • Risk appetite and assessment
  • Rules of procedure
  • Designated responsible persons
  • Training programs
  • Control measures

By understanding these various types of sanction risks and implementing effective risk mitigation strategies, businesses can reduce their exposure to financial penalties and reputational damage.