6 | FTReports FINANCIAL TIMESThursday30 January 2020

Trade SecretsSanctions

A

ccidentally lending

moneytothewrongRus-

sian oligarch or com-

pany trading with Iran

has never been a good

look for a bank — but now it can be

crippling.

Sanctions enforcers — especially in

theUS—havebeenflexingtheirmus-

cles in recent years with huge fines

andbankshavebeenfeelingthepain.

While no lender has come close to

the record sanctions fine of $8.9bn

that BNP Paribas agreed to pay in

201 4, the pressure has not eased off

since then. Standard Chartered paid

$1.1bn last year to settle charges that

it violated sanctions, while the previ-

ous year Société Générale agreed to

payUS authorities more than $1.3bn

to resolve an investigation. Italian

bank UniCredit also agreed a $1.3bn

settlement last year over allegations

that it violated multiple US sanctions

programmes.

It is therefore no surprise that,

aside from the usual griping about

being subject to too much regulation,

bankers are now trying to automate

their systems more by turning to arti-

ficial intelligence. Sven Bates, a part-

ner at law firm Baker McKenzie, says

that banks are using technology more

and more to help them manage sanc-

tionsandcompliancerisk.

Part of the problem comes when

trying to identify whether a prospec-

tive client — an individual or com-

pany — is subject to sanctions restric-

tions. It is easy enough to look up the

name of a person. But if a company is

owned by a shell company in a tax

haven that is ultimately controlled by

a sanctioned individual, that may not

besoeasytodiscover.

This process of checking whether a

new client is acceptable to take on —

what the banks call “onboarding” —

canbespeededupusingsoftwarethat

can identify whether customers have

links to sanctioned parties or

countries.

Such packages, Mr Bates says, are

becomingmoresophisticatedatiden-

tifying whether there is a sanctioned

shareholder or director with some

financial interest in the company

with which the bank is considering

dealing. Bankers at one US bank’s

trade finance team say they have met

with regulators to discuss how AI can

be used to track the movement of

goods, for example, by using technol-

ogy to highlight red flags such as an

auto supplier selling food that could

suggest some form of fraud or money

laundering.

There are some thorny exceptions

to this system in the world of trade,

however. So-called dual-use goods —

those that are in theory used for

benign purposes, such as electronics

or chemicals, but which can be

adapted for use as weapons — still

require manual analysis due to the

complexityinvolved.

“Technology... can help with effi-

ciency and compliance costs and all

firms will continuously review their

infrastructure and processes,” says

Neil Whiley, director of sanctions at

UK Finance, a trade body. “However,

it cannot mitigate all risks and cost

factors.”

Like other companies, when faced

with the complexities of trying to

work out whether a client might be in

breach of sanctions rules, many

bankshavesimplystoppedlendingin

certain countries. “The banks rightly

orwronglytendtolookatthisinquite

abinaryway,youhaveblanketblocks

on particular countries or industry

sectors,”notesMrBates.

Banks take the view that compa-

nies or individuals in a country sub-

ject to sanctions could come with a

whole host of other issues — such as

fraud, human trafficking or terrorist

financing — that could also play a role

in determining whether or not the

bankdoesbusinesswiththem.

A grey area is where the borrower

has some form of sales revenue in

countries subject to sanctions: if a

company has 90 per cent of its global

sales in Iran, a bank is likely to refuse

them;butsalesof1percentorevenas

high as 10 per cent might be allowed,

tradelawyerssay.

Banks are also structuring loans to

companies with clauses that state

that if a company breaches sanctions

rules, they are in breach of contract

and have to repay the loan. This

would not fully exonerate the bank in

the eyes of the regulator, but might be

seen as mitigating their responsibil-

ity. Banks also like such clauses as

they incentivise borrowers to invest

more in compliance to ensure they do

notbreachsanctionslaws.

Mr Bates says he hears bankers

complainaboutsanctionsregulations

alot.“Insomewaysthey’rebetweena

rock and a hard place: they’re under

so much scrutiny, but at the same

time they’re one step removed from

the situation — they don’t have all the

information at their fingertips like

customersdo,”hesays.

One banker complains: “For some

reason, banks have been put at the

forefront of fighting financial crime.

They’re not the police force, they are

acommercialentity,butbecausethey

areseentohavetheaccesstothedata,

when there’s a customer [sanctions]

breachtheyaretheonesthatgetfined

for it, which seems a bit harsh — and

thesefinesarequitesignificant.”

Anotherproblemforbanksiswhen

technology throws up false positives

— one of the biggest flaws with AI at

present, according to the US bank’s

trade finance team. That can lead to

conundrums: if a bank freezes funds

to a company or individual because it

wrongly believes they are subject to

sanctions, it could get sued. If it does

not freeze the funds when it ought to

have,theregulatorwillfinethem.

Bankers and trade lawyers suggest

that regulators could give them more

of a steer in certain cases rather than

staying neutral. UK Finance says it

would like to see the British govern-

ment introduce enhanced informa-

tionsharingpowerssothatbanksand

other sectors can share information

inasecureenvironment.

But regulators, by contrast, do not

seethisaspartoftheirremit,suggest-

ing the delicate and risky balancing

actthatbanksfaceisheretostay.

Banks tread softly through minefield

FinanceLenders hope

technology will help

them spot breaches

and avoid severe fines,

writesAlice Ross

‘Banks are not the police,

but as they are seen to

have access to the data,

they are who is fined

when there is a breach’