Outdated U.S. Sanctions Regime Could Leave U.S. Financial System Open to Abuse, Requires Modernization

New Report Proposes Recommendations to Empower Financial Institutions to Help Fortify U.S. National Security

Washington, D.C. — The Bank Policy Institute published a new report today titled “Reforming the U.S. Sanctions Regulatory Regime: How a Smarter, Risk-Based Approach Can Make Sanctions More Effective.” The report discusses the outdated and insufficiently focused nature of the regulatory regime, which in turn leaves U.S. sanctions programs vulnerable to evasion and abuse by human rights violators, international criminals and rogue state-owned entities that threaten U.S. national security. The report recommends several legislative and regulatory fixes to help fortify U.S. sanctions compliance programs, including through enhanced public-private information sharing, the elimination of shell companies and other loopholes and the affirmation of a risk-based sanctions compliance approach for U.S. banks. These changes would empower financial institutions to design compliance programs optimally suited to improve detection and encourage collaboration with national security and law enforcement.

A diverse array of issue experts from the fields of law enforcement, national security, diplomacy, banking law and computer science contributed to this report through a series of closed-door symposia hosted in October 2019 and October 2020. The report was developed in collaboration with WilmerHale, whose team was led by David Cohen, former deputy director of the Central Intelligence Agency and under secretary for terrorism and financial intelligence at the Treasury Department.

“A modern arms race exists between financial institutions and sanctioned entities seeking to circumvent detection by exploiting the complexities of today’s global financial system,” stated BPI President and CEO Greg Baer. “The adoption of these recommendations, developed with extensive engagement from the world’s leading sanctions experts, will create a system better designed to prevent the world’s worst of the worst from abusing the U.S. financial system.”

“The U.S. Government looks to financial institutions to advance core national security and foreign policy goals through its sanctions programs. It serves everyone’s interest for financial institutions to tailor their sanctions compliance in ways that best advance those goals,” added WilmerHale Partner David Cohen. “This paper contains recommendations that, if implemented, would help to achieve important national security and foreign policy interests by establishing a stronger framework for financial institutions to practice effective risk-based compliance. This includes leveraging new technologies to better identify and analyze activities by sanctioned parties that most threaten U.S. interests.”

The key recommendations identified in the report include:

  • Treasury’s Office of Foreign Assets Control should adopt a rule codifying its endorsement of a risk-based approach to sanctions compliance, encouraging innovative, risk-based compliance programs, and clarifying that such programs do not necessarily include screening of domestic-only transactions, which the federal banking agencies should explicitly acknowledge.
  • The federal banking agencies should clarify that the 2011 Guidance on Model Risk Management does not apply to sanctions screening models.
  • Congress should pass, and the president should sign, legislation prohibiting anonymous shell companies.
  • OFAC should maximize its resources to further prioritize list maintenance and address acute licensing and compliance demands.
  • Policymakers should establish a public-private sector information sharing framework to reduce the information silos that impede effective sanctions compliance.
AML, Bank Secrecy Act
Reforming the U.S. Sanctions Regulatory Regime: How a Smarter, Risk-Based Approach Can Make Sanctions More Effective
Introduction For the past two decades the United States has relied on economic and financial sanctions to promote U.S. national security and foreign policy interests. The number and complexity of U.S. sanctions have increased dramatically as economic warfare has largely replaced kinetic warfare as an alternative to diplomacy. The ramifications of these expanded sanctions programs …
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