US sanctions: Compliance costs swell as landscape shifts

As Washington leverages sanctions to ratchet up pressure on countries including Venezuela, US banks are passing compliance costs on to clients in certain cases.

US lenders face an increasingly complex regulatory landscape and have seen their compliance departments grow in size in lockstep, BNamericas was told.

Among banks most exposed are those in Florida – home to a large Venezuelan diaspora – and other international hubs such as New York.

“Right now, sanctions compliance is probably the top risk facing international banks and financial institutions,” Andy Fernández, a board member of the Florida International Bankers Association and partner at international law firm Holland & Knight, told BNamericas.

“The sanctions have gotten extremely complicated,” Fernández (pictured) said. “It’s not easy. What used to be something that was pretty simple and germane, of applying a list, downloading a list, grabbing a list of names and applying them to your accounts and your transactions, has morphed and evolved into sanctions that apply on a limited basis, sanctions that apply to countries, sanctions that apply to regions within countries, sanctions that apply to transaction types - and that’s where we’re really seeing the challenge.”

Compliance units within banks have, in some cases, become the largest departments – and increasingly expensive to run - as managers pump resources into training to ensure that staff keep pace with changes in the regulatory space. In Latin America, US President Donald Trump is using sanctions to pile pressure on the Venezuelan regime of Nicolás Maduro, with the focus largely on regime officials and the state oil industry – a key revenue generator for the cash-strapped country. Trump also has Venezuela allies Cuba, Russia and China in his crosshairs.

Banks, as well as non-financial institutions such as exporters, have fallen foul of the law in the US. The Treasury Department can, and has, fined both US and non-US companies for compliance breaches.

Previously, potential clients could typically shop around to find a bank that does not impose compliance fees. But, today, choice is limited and some lenders may even reject the business, Fernández said.

“I see it in the Venezuela space,” Fernández said. “It’s a shame, but private companies that do business in Venezuela are really having a hard time maintaining banking relationships and processing activity. There’s certain banks that are willing to accept that risk and handle that risk. I know those institutions are charging a fee for that, because they have to, because the compliance costs associated with those customers has increased significantly.”

VENEZUELA BANKS

In Venezuela’s commercial banking sector, the risk is reputational, Fernández said. Even though an institution may not have been sanctioned, external parties may avoid doing business with it simply because of the fact it is a financial institution located in Venezuela.

MORE SANCTIONS?

“It’s hard to tell, and if I had a crystal ball I would be very rich, but I think sanctions are here to stay,” Fernández said. “I think more sanctions are coming; they’re likely going to be targeted. I see it more as a surgical approach; that they’re going to continue to strategically target certain areas, sectors, individuals, and sanction them.

“Whatever administration is in the White House has realized that they could implement their foreign policy through sanctions. We saw it under Obama with Russia-Ukraine, and we’re seeing it now under the Trump administration with Venezuela. I just think this is the new normal.”

OPPORTUNITIES

The complex compliance landscape, while a headache for banks, presents opportunities for external service providers, particularly in the area of staff training.

Fernández said: “Banks need resources, they need help, anything that will assist in identifying, flagging potentially sanctionable activity. I don’t know if there is a [technological] solution out there that will be able to provide a 100% solution to this because sometimes these sanctions are targeting a transaction type as opposed to parties.”