Banking on Sanctions: 12 Compliance Tips on How to Improve Relations with your Financial Institution

March 9, 2021
By: Amir Fadavi Ardekani, Sanctions Specialist, BNP Paribas*

It has been a couple of years since banks around the world started acting more cautiously when it comes to economic sanctions. Words and phrases like de-risking, reputational damage, restrictive policies, and over-compliance are repeated more frequently by those working for compliance departments within financial institutions.

For banks’ clients, the shift in the attitude of the banks toward sanctions means numerous compliance-related questions, longer delays in transaction processing, being refused for some products and services, additional languages in the contracts, termination of relationships, and many other problems that did not exist before. As a result of the banks’ ramp-up in complying with economic sanctions-related restrictions, many clients, especially individuals and smaller businesses, are negatively impacted.

Why Banks are Becoming More ‘Risk-Averse’ – How We Got Here

The risk-averse attitude of banks vis-a-vis sanctions risks could be attributed to two main reasons.

First, banks have paid and are still paying a hefty price for not respecting a complex set of restrictions imposed by different sanctions programs and regimes. To name a few, BNP Paribas paid $8.9 billion in 2014, HSBC paid $1.9 billion in 2012, Commerzbank AG paid $1.45 billion in 2015, and many other U.S. and non-U.S. banks which have paid millions in fines. After imposition of such large fines, many banks are now simply trying to continue their business without any major financial loss inflicted by such fines. (After all, banks are doing business for profit.)

Second, the high cost of compliance for banks pushed them away from gray areas. Banks are spending immense budgets for compliance to avoid fines. The high cost of compliance, in turn, stems from two factors.

The first factor is that laws and regulations governing economic sanctions are fast-changing, vague and open to interpretation in many instances. In addition, there is not much precedent for banks to rely upon in this field as governments’ actions in imposing sanctions have rarely been subject to litigations partly due to the extreme deference given to the agencies in charge of implementation of sanctions.

The other factor is lack of enough information about a given transaction which in turn makes it difficult for banks to process that transaction. The less banks know about a transaction, the less likely it is for them to process it.

How the Risk-Averse Approach of Banks May Affect Their Clients

The short answer to the question of to what extend banks’ clients have been affected by risk-averse approaches of banks is ‘it depends on the bank.’ Some banks have taken the decision not to touch any transaction or relationship relating to sanctions targets. These sanctions targets could be as varied as a whole country, a sector of a country’s economy, anyone government, an organization, an individual, a vessel, an airplane, or even a crypto wallet. As a result, these banks have terminated several of their relationships with clients whom they considered too ‘risky’. Though criteria may differ from bank to bank, factors like certain geographical locations, nationalities, or the business sector in which a client is active may all be taken into consideration to determine risk.

On the other hand, other banks have implemented a less risk-averse approach. While this did not necessarily culminate in the termination of certain relationships, it caused longer delays in the processing of some transactions, sets of questions, requests for documentation, and the like.

Today, it is hard to find a bank which provides services to its clients without asking many questions related to the potential exposure of a client to sanctions.

12 Ways to Improve Your Relations with the Bank

Though there is little that can be done about the ever-changing nature of sanctions, compliance suites can assist their bank in a number of ways to make the processing of transactions as smooth as possible.

  1. Put yourself in your banks’ shoes

First, it is really important to understand banks’ stance on sanctions. To avoid fines, they have to respect a set of complex laws and regulations in jurisdictions where they are conducting business. Even further, sometimes they need to take into consideration regulatory expectations, which are in many cases more stringent than laws and regulations themselves. The stakes are even higher than paying fines for banks as a bank may lose its ability to access the U.S. financial system for engaging in an activity targeted by U.S. sanctions. Losing access to the U.S. financial system is almost like a death penalty for most of the banks (imagine a bank which cannot transact in U.S. Dollar). So, it is helpful to understand where banks’ concerns are coming from.

  1. Be transparent

It is of the utmost importance to be transparent with your bank when it comes to sanctions. In many cases banks may accept what you are planning to do if it is related to a sanctions target provided such activity has been carved out from the scope of sanctions. Yet, if you try to hide a piece of information, then banks will have a hard time working with you. First, it is the question of a broken trust; second, they may be legally obliged to take some steps once they find out that a piece of information has been hidden.

  1. Be aware that banks are communicating with regulators

Banks are under the obligation to report several events to their regulators. The range of such information sharing varies depending on the jurisdiction but, in general, it is very broad. Bear in mind that the bank which reports a transaction or activity to its regulator does not necessarily have to be your bank. It can be a correspondent bank with whom your bank is working. Such reports could trigger a closer look by a regulator into the reported conduct.

  1. Explain your business to your bank

Sometimes banks do not understand your business model and what you are doing or planning to do. To avoid the delays or irrelevant questions, make things clear for them. The more you explain your business and your transactions to them, the easier they assess the risk associated with your transactions and activity which, in turn, will lead to a faster treatment of your transactions.

  1. Show them that you care about compliance

It is possible to clear many sanctions hurdles by showing that your enterprise is paying attention to compliance topics. The level of your compliance program could vary depending on your sector, size, and other factors, yet in some cases, just a simple systematic counterparties’ name screening against relevant sanctions lists will bring a lot of comfort to your bank. Having a dedicated person for compliance-related matters as well as having policies addressing sanction risks can be very comforting for banks as well.

  1. Ask in advance

If you are not sure whether a transaction or an activity will be accepted by your bank, ask them in advance. This will help you not to experience delays or unwanted rejected transactions when a transaction is initiated. Being proactive also evidences your cooperative attitude with the bank and increases the trust between you.

  1. Banks are not your lawyers; get one (or more)

Do not expect your bank to explain all the sanctions restrictions to you. To find out more about sanctions and how it affects you, reach out to an attorney who can help you understand sanctions restrictions and their applicability to you and your business.

  1. Engage with your relevant regulators before coming to your bank

If you are planning to do a transaction which requires you to get a specific authorization or license from an authority, first ensure you have it before reaching out to your bank in order to see if they are willing to process such a transaction.

  1. Try to diversify your banking relationships

This is a very important and pragmatic point. Not all banks have the same level of risk tolerance. Therefore, it is helpful to maintain relationships with different banks so you can route transactions to each of them based on their respective risk appetite. Banks also feel more comfortable when they see there are other banks working with a client. To them it means (i) that this client has been reviewed and accepted by different compliance teams in different banks; and (ii) that if a bank is not able to accept a transaction then there are other banks to process that transaction for the client (instead of worrying about the fact that a client may try to find a way to indirectly send or receive a transaction which was not accepted).

  1. Try to find out about a bank’s policy before entering into a relationship with them

If you are looking to establish a new banking relationship, it is a good idea to know the bank’s compliance stance before establishing a relationship with it. This, in turn, will save a lot of time and energy for you and your bank later into the relationship. If you choose to work with a bank which is considered too restrictive for the type of activity you want to engage in, then you have to always produce large volumes of documents for each transaction, respond to several questions, wait longer for transactions to be processed, etc.

A good way to find out about banks’ policies is by (i) finding out whether there has been a recent enforcement action against them, (ii) looking at the banks’ website to see if you can find information about their compliance (major banks have usually a dedicated page on their website about their sanctions/AML/CTF policies), (iii) asking them directly; and, (iv) looking at the news and public disclosures to see if the bank you are considering is currently under investigation by authorities.

  1. Think about other types of risks

Compliance obligations of the banks are not only limited to sanctions. Banks have to think about other types of risks like bribery and corruption risk, money laundry risk, and terrorism financing risk. This means that banks have to look at a transaction from different angles. The more you think about those risks and trying to proactively address them, the more likely it is that your bank will process your transactions in a timely manner.

  1. Know your counterparties

It is common that a counterparty with whom you work does something that damages your relationship with your bank. For example, a buyer of your supply decides not to mention certain pieces of information when initiating a transaction for paying you, or it decides to alter some information to ensure a transaction comes through faster. Even though you have no control over your counterpart’s actions, it could negatively impact your banking relationship. Therefore, it is always helpful to speak with your counterparts to ensure they will not act in a way which would affect you and your banking relationships.

* Amir is a Sanctions Specialist at BNP Paribas headquarters in Paris. He is a New York-licensed attorney specialized in OFAC sanctions, BIS restrictions, and EU restrictive measures. In his current role, Amir assesses the applicability of the U.S. sanctions to the activities of the bank in Europe. He also advises the bank on matters related to the EU restrictive measures.