Memorandum by the British Bankers Association
INTRODUCTION
1. As good corporate companies, banks wish
to fulfil their legal obligations as expressed in legislation
adopted by Parliament and the regulatory obligations decided by
the FSA. In particular they are under an absolute obligation to
comply with the terms of the various sanctions notices circulated
by the Bank of England. In so doing, they will be assisted by
legislation and regulations which take fully into account the
objective operational environment in which financial institutions
carry out their business. Both the Chancellor of the Exchequer
and the National Financial Intelligence Unit have recognized the
critical importance information provided by the banks to the investigation
of terrorist activity. The names of those arrested on August 2006
to prevent terrorist attacks against aircraft were circulated
by the Bank of England under their sanctions procedures.
2. Banks have a duty to their law-abiding
customers, wherever resident, to carry out their lawful instructions,
unless the names of such customers appear on lists circulated
by the Bank of England or the banks are prohibited from so doing
by country-specific sanctions—this obligation is of course
overridden in those circumstances defined by the 2002 Proceeds
of Crime Act and subsequent legislation.
3. Banks have an obligation to their shareholders
to maximize the return on capital, subject to the above and in
conformity with their medium and longer term business planning.
4. They face difficult choices in respect
of sanctions adopted unilaterally by other countries, primarily
but not exclusively the US, which are not legal obligations enforceable
in the UK on activities originating in this country. If US pressure
in respect of such transactions is ignored, this could have an
adverse effect on the commercial activities of British-based banks
in that country or even lead to the risk of their employees being
detained when transiting the US. An additional consideration is
that Office of Foreign Asset Control (OFAC) obligations are applicable
to US nationals and US-owned interests located in the UK. This
can lead to difficulties where US citizens are employed (especially
in senior positions) within UK incorporated banks.
5. Banks have a more general interest in
the free international flow of goods, services and the accompanying
financial payments as well as the undistorted movement of investment
capital and dividend payments. The Committee might like to be
aware of a Communication from the Group of 77 developing nations
and China to the Eleventh Session of the UN Conference on Trade
and Development in 2004 expressing "deep concern at the increased
application of coercive measures and unilateral sanctions against
developing countries including the new attempts aimed at extraterritorial
application of domestic law."
6. Many of the questions circulated by the
Committee concern the justification for and effectiveness of sanctions.
The banks have focussed on the unwieldy nature of sanctions lists,
the consequent difficulties of compliance and what is perceived
by some to be a drive by the US authorities to expand the reach
of unilateral US measures. Nevertheless the banks consider that
a view on the cost benefit analysis of the current sanctions regime
could usefully form part of the Committee's conclusions.
ANSWER TO
QUESTION 5
7. Apart from the US, country-wide sanctions
are mainly used in time of war. In dealing with sanctions against
named individuals on UN, EU, or sometimes on US lists, UK financial
institutions face specific technical problems which are not capable
of easy resolution. There are at least 34 different sanctions
lists with varying degrees of consistency in respect of both content
and format (eg the same sanctioned individual on both Bank of
England and OFAC lists can be shown with different spellings).
UK banks are required to check against over 6,000 names. The names
entered on such lists often come without a "single unique
identifier" such as a date of birth, which helps narrow down
the focus of transaction monitoring search. The inclusion of names
without unique identifiers places a disproportionate burden on
the banks, which are legally obliged to search their customer
base and isolate their intended target from others with similar
names—but without adequate information. The names are often
aliases, transliterations from the Arabic are not standardised,
and there is a fairly small range of given names. An exact match
search would be unlikely to produce any target matches. Using
a fuzzy logic search throws up partial matches including variations
in spelling and will produce a high number of "false positives"—ie
customers who match the search criteria but who are highly unlikely
to have any connections with terrorism. A bank then has to use
expensive human manpower to whittle down the list. This can lead
to customer complaints and delays. If an innocent party has been
incorrectly identified as a sanctioned individual, it can take
a considerable time to unblock their accounts. The extent of the
problem is determined partly by how much extra resource a bank
devotes to further screening.
8. An additional point is that there is
no acknowledged standard for matching software or criteria across
the industry for either payment or customer screening. Firms are
dependent largely upon vendors for decisions in this area, which
is not appropriate. Another issue is how long firms should take
to narrow down potential matches as the authorities expect funds
to be blocked immediately. The targets will themselves be aware
that their names are listed on a sanctions list and take measures
to disguise their true identity, work through proxies or disburse
the funds.
9. The experience of "blanket sanctions"
against a country, as happened with Iraq, caused significant problems
for financial institutions. The sanctions were aimed at any "Iraqi
nationals" but banks did not historically record nationality.
It was therefore very difficult to identify all such customers
and freeze their accounts. Furthermore, once frozen, there was
a long and very labour intensive process of appeal by the customer
to the Bank of England, which could authorise certain sums for
certain reasons (eg medical expenses) which caused further uncertainty
and operational difficulties for the banks concerned. It was also
questionable whether restricting access to funds for ordinary
Iraqis in this way actually made any difference to the Iraqi regime.
Banks commented to the UK Government that blanket sanctions were
costly and ineffective and asked that, in future, such a technique
not be used. Rather, specific targeted measures similar to the
FATF countermeasures should be used—this seemed to stand
a better chance of affecting the targeted government.
10. A further issue is that compliance tolerance
for economic sanctions is regarded as zero- failure when in practice
a risk-based approach has to be applied. There is no guidance
on whether firms should be able to rely upon the due diligence
undertaken by their (similarly regulated) correspondent banks'
payment screening mechanisms (eg domestic UK bank to bank payments).
11. In general the banks have cordial relations
with the Bank of England's Sanctions Unit. The Bank tries hard
to ensure the consolidated lists it circulates are as easy to
use as possible and corrects errors where it can but severe uncertainties
remain. The banks recognize and accept that the Bank of England
is not in a position to provide guidance on matching criteria.
They would welcome the opportunity to obtain from SOCA or another
source, extra information not provided in the original sanctions
list, in order to help them decide in difficult cases whether
a suspected positive hit was indeed a match. If a bank takes action
in good faith to block an account, it would not be afforded the
same protection against legal action by a dissatisfied customer
as would be the case in, for example, the US. UK firms are obliged
to report any breaches to the Bank of England. The perception
by the industry is that the regulatory authorities do monitor
sanctions performance and would be prepared to enforce compliance.
Sanctions compliance is an integral part of senior management
responsibility under the FSA's Senior Management Arrangements,
Systems and Controls. In general, a UK banking group will seek
to apply sanctions across the whole geographical spectrum of its
branch operations, not just to those in the UK.
12. The UN Coordinator on Sanctions to combat
terrorist financing is well aware of the problem with sanctions
lists. At a June 2006 meeting on sanctions between EU Member States
and the US, the private sector put forward the following wish-list:
— A solution to the problem of transliterating
Arabic names.
— Standard guidance from governments
on the treatment of non-Latin alphabet.
— Changes in data protection laws to
improve information sharing between individual banks on terrorist
suspects.
— Agreed procedure between banks to
indicate that a particular customer had been screened effectively.
— A solution to the problem of innocent
people repeatedly being identified as terrorist through sharing
a name or being a close match with terrorist subjects. A government
maintained register of such cases would help.
— Indemnity for banks from civil suits
by customers for taking part in a sanctions programme.
— Speedy communication with government
departments to resolve "pending" transactions.
13. Banks understand that information is
not always complete. But they question the utility of searches
with overly vague criteria. They also wonder about the utility
of the exercise when individual sanctions were made public and
often threatened in advance, one month in the case of the notice
for the Taliban, which allows potential targets to shift funds
to non-compliant jurisdictions and to use nominees. The technical
problems were reduced in the case of searches instituted after
the name list for UK terrorist suspects was published on 10 August,
possibly because the suspects were well-documented, including
date of birth, in the normal course of long-term residence in
the UK.
14. As the number of sanction lists increases
and the name lists lengthen, more questions are being asked about
the practical utility of such measures, except in a small number
of special cases such as Serbia and, in the more distant past
Southern Rhodesia as it was, when set against the costs of compliance.
One of the major clearers estimated its direct staff costs associated
with sanctions work as nearly £300,000 in 2004 but total
systems costs exceeded £8 million. The time of counter staff
dealing with actual/potential customers affected by sanctions
was not costed. In general terms, the large retail banks will
be spending £10's of millions per institution on systems
and millions per year in running/staff costs.
15. Unlike other G8 members, the US operates
a series of country sanctions regimes against individual countries
such as Cuba, North Korea, Iran and Syria. It has also adopted
unilateral measures against a number of designated entities and
individuals. In the case of Cuba, the US measures seek explicitly
to block trade and financial transactions between Cuba and Third
Countries. In respect of US persons, OFAC measures apply to Cuban
nationals described as "Blocked Persons" irrespective
of where they reside. In other cases, there is a degree of moral
suasion linked closely to the wish of foreign institutions with
exposure to US markets to avoid conflict with the several US regulatory
bodies, even in respect of those transactions which fall outside
their formal jurisdiction.
16. A further complication is that the majority
of international transactions between banks in US Dollars involve
clearance through a US correspondent bank. There is an exemption
allowed by the US authorities for transactions with Iran to continue,
provided for example no US bank or directly owned subsidiary is
involved in directly crediting or debiting an Iranian account.
OFAC operate general licences for most of their country sanctions.
These are complex procedures for UK institutions to implement
if they wish to protect their US franchises from US regulatory
exposure which often require substantial additional transactional
and customer information to make an informed decision. Subsequent
delays can have an adverse impact on good customer service.
17. Recent cases in which foreign banks
operating in the US have been fined $80 million and $100 million
respectively have led some banks to question whether the US has
in fact embarked on a campaign of informal pressure to squeeze
out foreign financial contacts with regimes on its black-list
for terrorism, WMD proliferation or other reasons. There is also
a suspicion, shared by some US observers that the penalties for
breaches levied against foreign banks are heavier than those applied
to domestic banks. OFAC would maintain that it has improved its
dialogue with the financial sector and become less autocratic
in its operations. So far, even major US banks remain to be convinced
and there is a real fear that OFAC's perceived hard line is beginning
to affect the way in which US regulators treat the US branches
or subsidiaries of foreign banks. In effect British banks end
up becoming an arm of US foreign policy, in the case of Iran at
variance with the UK Government's policy of legitimate commercial
engagement. In other cases there may be a clash between US requirements
and third country jurisdiction's approach.
18. Some years ago, the EU adopted blocking
measures to prevent firms in Member States from complying with
the Cuban Trade embargo and the Iran Sanctions Act. In practice
the EU and the US have in recent years worked out a modus vivendi
which reduces friction in this area for well-known cases such
as Cuba. The Commission is wary of opening another difficult area
in the EU-US dialogue without specific evidence of difficulties
from financial institutions in member states. They in turn are
wary of providing it for fear of poisoning their relationships
with the US regulators. Restrictions on financial contacts with
North Korea and Syria are fairly easily absorbed. A ratcheting
up of unilateral US pressure on those facilitating business with
Iran or Iranians living abroad would be a different question.
ANSWER TO
QUESTION 10
19. The banking sector considers that policy
makers do not take sufficiently into account the practical and
regulatory costs of applying new measures. Given the political
imperative behind sanctions resolutions and the inability to produce
better targeted data on individuals, this view may have more than
the usual merit when applied to sanctions.
September 2006
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