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Building an Export Controls and Financial Crime Compliance Framework

This article is the third in a series examining how export controls and financial crime compliance frameworks are converging as a result of an evolving regulatory landscape. Throughout the series, the authors will provide practical insights for financial institutions now facing additional obligations as a result of overlapping compliance domains.

The convergence of export controls and financial crime compliance signals a paradigm shift, requiring financial institutions to undertake an expanded role in safeguarding national security that goes beyond check-the-box compliance and instead becomes a strategic necessity and organizational priority. To stay ahead of increasing regulatory demands, financial institutions should develop a comprehensive compliance framework that integrates export control- and national security-related considerations.

When Building or Enhancing this Framework, Key Areas to Focus on Include:

Conducting robust customer due diligence, including specialized risk assessments to identify risks posed by export-controlled items, prohibited investments, and sanctions evasions, beyond just name screening.
Adding elements to identify export controls and national security risk to Know Your Customer processes, including ensuring that export control screening is added to traditional screening when collecting end-use/end-user information.
Monitoring for and investigating red flags for potential violations by establishing automated transaction alerts for potential high-risk scenarios, such as unusual behavior patterns, altered shipping routes, and sensitive components.¹
Reviewing investigative protocols so analysts identify and escalate possible export controls violations.
Implementing role-specific and scenario-based training across all levels of the organization to help showcase how violations can happen in actual transactions across export control and financial crime domains and demonstrate what signs potentially constitute a red flag.
Reviewing transactions of a bank with foreign correspondents in high-risk jurisdictions to identify red flags indicating potential sanctions or export controls evasion. Banks should focus on oversight to ensure their correspondents reasonably monitor for and identify suspected evasion activity.

Developing An Effective Compliance Program

The converging landscape requires a holistic evaluation framework that addresses national security risks, including export controls, and financial crime risks collectively rather than in silos. Financial institutions should work to understand what activities they are specifically financing, which is a necessary step in developing a robust compliance program capable of preventing illegal transactions. A streamlined and productive program should include a combination of advanced tooling and tactical frameworks, creating a resource-effective approach that ensures regulatory obligations are met, potential penalties and damages to reputation are mitigated, and U.S. national security and foreign policy interests are understood and incorporated into the compliance framework.

What’s Ahead And How to Prepare

Financial institutions can prepare for the likely increase in regulatory oversight by analyzing enforcement actions, conducting a robust risk assessment for national security risk exposure, and performing gap assessments to identify existing vulnerabilities within their programs.

Enhanced screening techniques can also help mitigate compliance risks. Financial institutions should consider implementing emerging technology, like artificial intelligence (“AI”) tools, to help detect complex patterns in datasets that might otherwise be missed. AI can also enable seamless data flows that eliminate time-consuming manual transfers among disparate systems. As a result, screening could become more effective and better able to identify compliance risks, both for export controls and financial crime.

Forward-looking financial institutions that address both domains comprehensively and in a unified manner may gain a competitive market advantage resulting from strengthened risk management programs and corresponding capabilities. Further, combining expertise from various business units, implementing tailored training, and leveraging new technologies will position organizations that take this approach to meet regulatory obligations head on and with confidence, including new enforcement actions that emerge, as the regulatory environment continues to evolve.

Footnote:

1: “FinCEN and the U.S. Department of Commerce’s Bureau of Industry and Security Announce New Reporting Key Term and Highlight Red Flags Relating to Global Evasion of U.S. Export Controls,” Financial Crimes Enforcement Network and Bureau of Industry and Security (Nov. 6, 2023).