Banks face longer transaction processing times and possible sanction violations as the coronavirus crisis puts pressure on their compliance control functions, experts warn.

Customers' rapidly changing supply chains are a growing concerns for banks. As lockdown measures are causing logistical challenges, businesses must increasingly change third-party providers at short notice, said Sven Bates, a U.K.-based senior trade and sanctions associate at law firm Baker McKenzie.

"Suddenly, we're seeing different types of third parties with different types of risk profiles in the SWIFT documentation," Bates said in an interview. "Where previously, there wouldn't have been a market need for the corporates to go to these types of third parties, now there's a certain urgency to fill a particular business gap."

New business partners sometimes come from higher-risk jurisdictions, or have higher-risk shareholders or more opaque shareholding structures, creating greater sanctions risk for banks and clients alike, he said. This also places a higher operational burden on banks, requiring them to conduct additional due diligence, screenings and sanctions reviews.

Sanctions evasions

Banks are also dealing with increased attempts to evade sanctions against countries including Iran and Cuba, said Max Lerner, global head of sanctions at State Street, during a webinar on April 16.

Trade of humanitarian goods is exempt from country sanctions programs, meaning banks can legitimately support transactions involving medical equipment, medicine or food supplies to Iran, for example, a country hard hit by the pandemic. While banks have historically shied away from any transactions involving Iran, the crisis is putting them under pressure to support humanitarian relief efforts related to COVID-19.

The Office of Foreign Assets Control in the U.S., or OFAC, recently clarified authorizations and exemptions that exist under sanctions programs related to Iran, Venezuela, North Korea, Syria, Cuba and Ukraine/Russia, in an effort to encourage banks that may have appetite to facilitate humanitarian trade to those territories, said Lerner.

But there is a risk that sanctioned entities will actively seek to exploit those exemptions during the coronavirus crisis to cover up sanctioned activity, said Vincent Gaudel, a compliance expert at Accuity, a provider of sanctions screening software.

"There could be sanctions targets that claim that a certain transaction is linked to existing authorizations on medical equipment and all those humanitarian licenses that exist. So they are forging documents to justify a transaction, whereas, in fact, it's not related to those permissible activities," he said in an interview.

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New operational risks

The fact that banks are working in "emergency mode" is further elevating their risk exposure, said Gaudel. With staff either working remotely or on a shift basis, it is harder for banks to maintain compliance control functions at their usual capacity, he said, adding that as sanctions screening includes processing sensitive data, some banks may not even allow operators to work from home, putting further pressure on the bandwidth of the compliance teams.

"There's an absence, or at least a difference in the normal control environment within the bank itself," said Bates. Lockdown-related disruptions to normal work routines are particularly impacting the timing of which transactions can be processed, he said. It is also creating a risk that suspicious transactions "slip through the net," especially for smaller banks that may face a bigger pressure on resources during the crisis, he said.

Regulatory understanding

Falling foul of sanctions regulations can have significant consequences for banks, and breaches account for some of the heaviest bank fines globally. French bank BNP Paribas SA, for one, was fined a record $8.9 billion in 2015 after violating U.S. sanctions against Sudan, Iran and Cuba.

Globally, fines issued as a result of sanctions violations amounted to $3.76 billion in 2019, all issued by regulators in the U.S., according to research by Fenergo, a provider of regulatory technology.

While coronavirus-related challenges are leaving banks more exposed to sanctions risks, the regulatory risk itself has not increased as a result of the crisis, as authorities have not released any new sanctions designations related to COVID-19, said Gaudel.

In fact, there are some indications that the coronavirus crisis could be a mitigating factor in future sanctions cases by regulators. OFAC recently encouraged financial institutions to share compliance concerns related to COVID-19 with the agency, and acknowledged that organizations may need to reallocate sanctions compliance resources during the pandemic.

"OFAC will evaluate this as a factor in determining the appropriate administrative response to an apparent violation that occurs during this period," it said.

The statement is a sign that OFAC is "being pragmatic" and recognizes the difficulties faced by banks and companies in the current environment, Gaudel said. While this could alleviate potential punitive measures against a bank that is be found to have breached sanctions during the crisis, he said this will likely only be the case if the bank's reassignment of resources is deliberate, justified by a "sound risk assessment" and has been communicated to OFAC.