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SWIFT Payment Screening and OFAC Sanctions
Sending and receiving money internationally can be complicated, especially when sanctions laws come into play. SWIFT, the Society for Worldwide Interbank Financial Telecommunication, operates a network that enables financial institutions to securely send money around the world. However, SWIFT must comply with sanctions laws set by the U.S. government’s Office of Foreign Assets Control (OFAC) and other regulators.
This article will explain how SWIFT payment screening works, what OFAC sanctions are, the implications of violating sanctions, and how financial institutions can stay compliant.
Contents
What is SWIFT?
SWIFT is like the plumbing behind international money transfers[1]. Over 11,000 financial institutions use the SWIFT network to send secure payment instructions. When you send money overseas through your bank, the funds don’t actually move between accounts. Instead, SWIFT sends messages to debit one account and credit another.
SWIFT is like a middleman that connects banks and provides standardized codes to facilitate transfers[1]. It doesn’t hold any funds itself. SWIFT merely transports instructions that banks must screen and approve before executing payments.
SWIFT Payment Screening
Since SWIFT doesn’t assess transactions itself, the responsibility for sanctions screening falls on member banks[1]. Before executing a payment order received via SWIFT, a bank must check it against sanctions lists to ensure the sender, recipient, and purpose comply with regulations.
Banks rely on filtering software to screen transactions against OFAC, United Nations, and other sanctions lists. If a potential match is flagged, it gets reviewed by a sanctions specialist to determine if it violates sanctions[4]. For example, a payment from a Russian bank to a North Korean company would likely get stopped.
Smaller banks may outsource screening to vendors like SWIFT. Larger banks often use proprietary systems, but can face challenges keeping up with frequently updated lists across jurisdictions[4]. No screening system is perfect, so human review is critical to catch borderline cases.
OFAC Sanctions
OFAC enforces U.S. economic and trade sanctions based on foreign policy and national security goals[2]. OFAC publishes and regularly updates lists of sanctioned countries, entities, vessels, and individuals. U.S. persons and businesses are generally prohibited from dealing with those on OFAC lists.
There are several types of OFAC sanctions[3]:
- Comprehensive country-wide sanctions (e.g. Cuba, North Korea)
- List-based sanctions focused on specific entities (e.g. Russian oligarchs, terrorist groups)
- Sectoral sanctions targeting industries like finance, energy, defense
- Secondary sanctions on foreign entities that facilitate sanctioned parties
Recent examples include sanctions on Russia’s metals and mining sector, and penalties against a Moscow bank[3]. OFAC also maintains the Specially Designated Nationals (SDN) list of over 6,000 companies and individuals subject to asset freezes and transaction blocks[5].
Implications of Violating Sanctions
The penalties for breaching OFAC sanctions can be severe, including civil fines up to $307,922 per violation and criminal fines up to $1 million for companies and individuals[6]. Banks have paid billions in fines for sanctions violations:
- BNP Paribas paid $8.9 billion in 2015
- HSBC paid $1.9 billion in 2012
- Standard Chartered paid $967 million in 2012
In addition to fines, banks can lose access to U.S. dollar clearing, essentially shutting them out of the global financial system[2]. Individual employees may face jail time[5]. The reputational damage from sanctions breaches can also be substantial.
Staying Compliant with Sanctions
Financial institutions must make sanctions compliance a top priority to avoid severe penalties. Here are some best practices[4][6]:
- Screen all transactions against OFAC and other lists, not just those that seem risky
- Update filtering systems promptly when new sanctions are announced
- Review any flagged payments carefully before approving
- Conduct periodic audits and staff training to identify weak spots
- Monitor transactions for red flags like omitted data, shell companies, proxy parties
- Ask for information about source of funds, purpose, and parties involved
- Maintain detailed records of screening and due diligence
- Have procedures to handle matches, escalate issues, and report to OFAC
Sanctions regulations are complex, evolving, and carry severe penalties for non-compliance. Financial institutions must be vigilant and proactive to detect prohibited transactions and prevent sanctions violations.
Avoiding Sanctions Violations
In addition to screening transactions, financial institutions should take other steps to avoid breaching sanctions:
- Conduct know your customer (KYC) due diligence to understand who their customers are and what types of transactions they conduct
- Provide regular sanctions training to employees to ensure they know the latest requirements and risks
- Implement strong internal controls, with checks and balances to prevent errors or abuse
- Deploy transaction monitoring systems to identify suspicious activity patterns
- Engage legal counsel to interpret complex or ambiguous sanctions rules
- Maintain detailed audit trails to demonstrate compliance efforts
Financial institutions should also be alert to potential signs of sanctions evasion, such as[4]:
- Efforts to omit or falsify information in payment messages
- Use of shell companies or front parties to disguise true counterparties
- Routing payments indirectly through third countries to obscure origin or destination
- Customers suddenly requesting payments to or from a newly sanctioned jurisdiction
Suspicious activities should trigger enhanced due diligence, escalation, and potential blocking or reporting[5][7].
Self-Reporting Violations
If a financial institution discovers it facilitated a prohibited transaction, voluntary self-disclosure to OFAC may result in substantially reduced penalties[8][9]. The key steps are:
- Conduct internal investigation to determine root cause and scope of violations
- Assess potential penalties under enforcement guidelines
- Draft thorough disclosure including remedial measures taken
- Obtain OFAC license to unblock funds if needed
- Negotiate resolution agreement and pay penalty
Providing full details and demonstrating the violation was inadvertent improves chances of securing a favorable settlement. But organizations should still expect to pay a price for sanctions infractions.
References
[2] Financial Sanctions, SWIFT, and the Architecture of the International Payments System
[4] FinCEN Alert on Russian Sanctions Evasion
[5] FinCEN Red Flags on Russian Sanctions Evasion
[6] New US Efforts to Prosecute Sanctions Evasion