December 10th, 2020 was Global Human Rights day. Three days earlier, the European Union adopted a new global human rights sanctions regime. The new regime is the EU’s attempt to take the first steps towards creating a “Global Magnitsky Act” based on the first Magnitsky legislation, installed in the United States in 2012.
What is the Magnitsky Act?
As the story goes, Sergei Magnitsky discovered $230 million in tax rebates from Hermitage Capital Management, an investment fund and asset management company that specializes in the Russian markets.
After Sergei’s discovery, he was accused of being involved in tax evasion, and was imprisoned in the Matrosskaya Tishina detention facility in 2009.
While in prison, Sergei was — allegedly — beaten so brutally by police that he died.
This lead to the United States Congress passing the Magnitsky Act, in 2012, which imposed sanctions on the officials involved.
The new EU sanctions regime
The new regime makes it possible to impose sanctions on individuals and entities that have been accused of human rights violations, such as those involved in Magnitsky’s murder.
Prior to this, the EU sanctions framework only prohibited sanctioning countries. This made it harder for the European Union to impose sanctions when human rights violations occurred in ally countries.
On the 6th of July, the United Kingdom also installed a Magnitsky-like sanctions regime. The UK managed to sanction 49 individuals and organizations that have been involved in some of the worst human rights violations and abuses in recent years. These sanctions target:
- 25 Russian nationals involved in the mistreatment and death of auditor Sergei Magnitsky, who uncovered widespread Russian corruption by a group of Russian tax and police officials
- 20 Saudi nationals involved in the death of journalist Jamal Khashoggi
- 2 high-ranking Myanmar military generals involved in the systematic and brutal violence against the Rohingya people and other ethnic minorities
- 2 organizations involved in the forced labor, torture, and murder that takes place in North Korea’s gulags
With the EU, USA, and UK coming together, it’s now possible to impose significant pressure on individuals. It blocks access to three of the world’s most used currencies. Other sanctions include blocking access to these regions and travel bans.
Screening transactions for sanctions
Banks are increasingly required to sanction individuals and entities. These days, sanctions aren’t just applied to a country.
They also apply to:
- Specific people
- Financing of specific activities
- Licenses for exporting specific goods to sanctioned countries
The new European sanctions regime against human rights violators mimics the rules against chemical weapons and computer network attacks.
Implementing the new sanctions regime will be similar to previous sanctions updates.
Here’s what you should do to cover the basics.
Complete and consistent data
The first step to making sure you don’t process any payments to sanctioned people is for data on your clients to be uniform and accurate. All data fields must be filled, and there must be one way of registering that data.
This helps in two ways. First, by enriching alerts, fewer false positives are generated. Second, the compliance officer needs all the available information to assess alerts.
Many variables make it harder to determine if an alert is a valid sanctions match. Alphabets, languages, cultures, spelling, abbreviations, acronyms, and aliases are all factors to consider. Automated screening adds complexities such as “fuzzy matching” algorithms, workflows, and match rules.
One of the more challenging issues in sanctioning individuals are name variations. Sanctions screening software needs to include a fuzzy logic tool to detect sanctioned persons even if their name is spelled differently. Not only should you check for identical name matches, but you also need to screen for variations on the name.
- Phonetic similarities: this includes similar-sounding names, for example, Craig and Greg.
- Incorrect hyphens or spaces: when a non-Latin name is converted to a Latin name, punctuation differences can occur. Or some letters or components may go missing.
- Different spelling: the same name can be spelled differently, such as Sean or Shaun, Sofía or Sophia, Muhamed or Mohammed.
- Titles: referring to titles such as mister, lady, reverend, or dr.
- Different order: in some countries, it’s more usual to switch the order of the given name and surname. For example when the first initial does not match the (used) first name.
- Multiple languages: screening usually happens against a Latin list, but what if the beneficiary name is written in another language such as Arabic or Chinese.
- Nicknames: when individuals operate under a known alias, you also need to recognize variations on those nicknames.
- Initials: instead of using a full first name, only the initial could be used.
- Similar names: when the name sounds similar but different, such as Amelia, Melia, and Emelia.
- Noise simulation: when characters are added or switched. For example, when a zero is used to indicate the letter O.
- Name transliteration or translation: non-Latin names can be transliterated to Latin, or the name can be translated. For example, Akbar is transliterated from Arabic; translating it would change the name into the Greatest.
Holding your own internal sanctions lists is a recipe for disaster. It means that you have to continuously update your lists. It’s much easier and accurate to connect to online lists published by authorities that issue sanctions. That way, you’ll make sure your lists are current after every update. There are also other sources to check such as adverse media sources. Whatever approach you take, make sure you double-check the reliability of the sources you’re using.
Mind your data
The purpose of sanctions is to promote security and foreign policy. It aims to promote peace, democracy, and respect for the rule of law, human rights, and international law. Sanctions by the European Union are designed to pressure a country, government, entity, or individual into changing their policies or activities.
The new sanctions regime against human rights abuse is targeted to minimize the negative impact on the local population, and reduce the amount of illegal activities within a country.
Compliance with targeted sanctions requires more effort from banks. Sanctioned individuals won’t make it easy to block their transactions. Especially the savvy ones will go to lengths to mix up their name or create aliases.
The most critical tool in your defense is data.
The more information you have on your clients and the more accurate your data is, the less likely you are to process a payment from or to a sanctioned individual.