What is a sanction?
Sanctions are penalties imposed on a country, its authorities, or individual residents as a form of punishment or to offer disincentives for specific policies and acts, including:
- Breaking international law
- Money laundering
- Terrorist financing
- Drug trafficking
- Human rights violation
- International contract violation
- Weapon proliferation
Travel bans and export restrictions, as well as trade embargos and asset seizures, are examples of economic sanctions. Such sanctions, by definition, apply to those who are not easily prosecuted by the sanctioning state.
Sanctions responsibilities cannot be delegated to others just because brokers are neither risk carriers nor insurance buyers.
In fact, the role brokers carry out as intermediaries in a complex and everchanging marketplace makes them especially susceptible for targeting by criminals and unwittingly facilitating transactions with sanctioned entities and individuals.
The war in Ukraine has brought sanctions to the wider public attention. The US, EU and UK have together sanctioned over 1,000 Russian individuals and businesses.
The fact remains however, that the necessity for brokers to have in place robust systems and processes for compliance is not a new thing, cannot be ignored and must form part of all brokers overall governance controls.
Regardless of their role in an insurance deal, brokers must verify that their potential clients and trading partners aren’t barred from entering insurance transactions.
However, carrying out these checks can be a challenging task.
What is the impact of the task and responsibilities brokers have and how can the manage risks?
Sanctions screening is a technique financial institutions employ to detect, prevent, and manage sanction risks. It involves screening individuals or organisations against sanction lists, a compilation of individual sanctions that have been applied to individuals, countries, groups or companies under international and domestic sanction regimes. Government agencies or bodies issue the lists, including regulators or police and also set the legal requirements for screening.
All UK legal entities established under UK law, including their branches, must comply with UK financial sanctions that are in force, irrespective of where their activities take place.
In addition to the aforementioned legal obligations, insurance brokers in the UK are required by regulation to put in place adequate systems and controls to manage the risks of financial crime, including ensuring compliance with the UK’s financial sanctions regime.
Failure to do so may result in regulatory action by the Financial Conduct Authority against the firm and its senior management. As a result of the Senior Managers and Certification Regime, the liability of senior management for system and control failures should be particularly concerning to brokers.
Misconceptions about screening
Brokers should not make assumptions about screening new and existing customers and trading partners. Short term deals, wholesaled business and/or introductions that arrive via other regulated firms are not reasons for brokers to avoid screening.
Whilst insurance distribution chains can be complex and involve many outsourced roles, brokers must remember that they cannot outsource their legal and regulatory responsibilities.
Screening is not just about customers. It is important that screening and ongoing surveillance is maintained across all counterparties through which a transaction could contravene a sanction. This includes suppliers, markets, TPAs and producers.
Ultimate Beneficial Owners
As part of a screening process that mitigates risk and improves money laundering prevention, brokers must establish who is ultimately controlling and benefiting from the business relationship.
Identifying and screening the UBO is critical and if transparency cannot be achieved the opportunity should be turned away.
Challenges for brokers
Sanctions and AML compliance demand quick and proactive adaption of processes to stay ahead of an increasingly steepening curve.
Whilst many screening process are now automated, firms still face increasing volumes of highly manual tasks, such as reviewing and clearing alerts and false positives.
It is these inefficient manual processes that result in inaccurate results. Firms should integrate automated solutions into their current IT infrastructure to address these inefficiencies.