Policy Alerts
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China Announces “Provisions on the Unreliable Entity List"
September 24, 2020 |
Press reporting on thousands of leaked Suspicious Activity Reports (SARs) filed by financial institutions with the U.S. Financial Crimes Enforcement Network (FinCEN) has highlighted longstanding challenges to current anti-money laundering and countering the financing of terrorism (AML/CFT) efforts. Against this backdrop, the announcement that FinCEN is seeking public comment on important reforms to its regulations provides a critical opportunity for financial institutions and other stakeholders to begin shaping the future of the AML/CFT regime.
On September 19, China’s Ministry of Commerce (MOFCOM) released an administrative order – the “Provisions on the Unreliable Entity List” (“the UEL”) – that provides initial procedures for the designation of persons, companies, or organizations that act contrary to China’s interests, as well as laying out possible sanctions. While China has not yet targeted any persons or companies under this authority, non-Chinese firms operating in China or with Chinese counterparties should monitor developments regarding implementation of the new order to better understand their potential exposure.
On September 1, the U.S. Departments of State, Treasury, and Commerce issued a North Korea Ballistic Missile Procurement Advisory (“the Advisory”) calling attention to how Kim Jong-un’s regime obtains goods for its missile program.
This month’s coordinated U.S. multi-agency enforcement action against online broker Interactive Brokers (IBKR) signals authorities’ ongoing concerns about anti-money laundering/combating the financing of terrorism (AML/CFT) risk in the securities and commodities sectors and underlines the need for capital markets participants to design and implement comprehensive AML/CFT programs.
During the week of August 3, the Trump administration took additional steps to address perceived national security threats from China through the use of economic measures. In succession, it imposed targeted sanctions on additional Hong Kong and Chinese officials responsible for imposing China’s new national security law in Hong Kong and issued Executive Orders directing the Commerce Secretary to identify prohibited transactions with certain Chinese technology companies.
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On August 3, 2020, the Financial Crimes Enforcement Network (“FinCEN”) issued responses to three frequently asked questions (“FAQs”) regarding customer due diligence (“CDD”) requirements for covered financial institutions, which reinforce the importance of the risk-based approach without prescribing specific processes for collecting and analyzing CDD information.
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On July 27, 2020, the United Kingdom’s Office of Financial Sanctions Implementation (“OFSI”), the office in Her Majesty’s Treasury responsible for administering UK sanctions, released Maritime Guidance: Financial sanctions guidance for entities and individuals (the “UK Guidance”).The UK Guidance warns those in the maritime sector about sanctions threats they face, identifies examples of illicit activity, and makes recommendations for how companies can limit their sanctions risks.
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On July 14, 2020, President Trump took additional actions to address China’s policies regarding Hong Kong. These actions follow last week’s designation of high-ranking Chinese officials for alleged human rights violations in the Xinjiang Autonomous Region (“Xinjiang”) in western China and have potentially significant implications for corporations, financial institutions, and the global banking system.
On June 24, 2020, the Financial Action Task Force (“FATF”) held its plenary meeting virtually. It was the final plenary of China’s presidency of FATF; Germany will now begin its two-year term. As part of the plenary outcomes, FATF released several documents, including a new report on the illicit financial networks that support illegal wildlife trafficking (“IWT”).
The growing rigor of virtual asset service provider (VASP) regulation and supervision globally has strengthened the compliance focus of leading VASPs, increasing their access to the traditional financial system and to sophisticated financial services.
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In response to Beijing’s moves to impose a controversial national security law on Hong Kong, President Trump announced on May 27th a limited visa ban on Chinese students and possible future steps that could include sanctions on Chinese officials and financial institutions.
On May 14, 2020, the U.S. Department of State, the U.S. Department of the Treasury, and the U.S. Coast Guard jointly released a long-awaited “Sanctions Advisory for the Maritime Industry, Energy and Metals Sectors, and Related Communities.”
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The United Nations and the United States Government have released significant reports that detail North Korea’s continued efforts to engage in wide-ranging sanctions evasion activity in support of its weapons of mass destruction and ballistic missile programs.
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FATF Upgrades U.S. Customer Due Diligence Regime
April 2, 2020 |
On March 31st, the Financial Action Task Force (FATF)—the global AML/CFT standard-setting body and watchdog—announced that it has upgraded the United States for technical compliance with FATF Recommendation 10 following implementation of the U.S. Treasury’s new customer due diligence (CDD) requirements.
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FATF Calls for Reimposition of Countermeasures on Iran
February 24, 2020 |
The Financial Action Task Force (FATF) on February 21, 2020, reintroduced its call for countries to impose countermeasures to protect themselves from illicit finance threats emanating from Iran. The call for countermeasures will increase risk for financial institutions with exposure to Iran.
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U.S. Expands Sanctions on Iranian Metals and Textiles Industry and Senior Officials
January 13, 2020 U.S. Sanctions Venezuelan Government
August 7, 2019 |
The Trump Administration on January 10, 2020, issued broad new secondary sanctions with respect to Iran’s construction, mining, manufacturing, and textiles sectors in an effort to target additional sources of revenue used by the Iranian regime, as well as with respect to additional members of the Iranian leadership.
The U.S. House of Representatives on November 20, 2019, passed the Senate version of a bill targeting Hong Kong and Chinese officials responsible for the violent crackdown on protesters in Hong Kong. The bill passed the Senate unanimously, and the House passed the bill 417-1, but President Trump suggested that he might veto the bill.
The U.S. Senate on November 19, 2019, unanimously approved sanctions targeting Hong Kong and Chinese officials responsible for the violent crackdown on protesters in Hong Kong, threatening to further strain U.S.-Chinese relations as trade talks are at a critical stage.
The Treasury Department on October 25, 2019, imposed a ban on correspondent account relationships involving Iranian financial institutions under Section 311 of the USA PATRIOT Act – activities that were already prohibited by U.S. sanctions – and announced a new mechanism for non-U.S. banks to process humanitarian transactions for Iran.
The President on September 10, 2019, authorized the Treasury Secretary to impose sanctions on non-U.S. financial institutions that have knowingly conducted or facilitated a “significant” transaction with anyone sanctioned by the United States as a specially designated global terrorist (SDGT).
Growing Chinese Illicit finance threats, vulnerabilities, and exposure are combining to increase illicit finance risk in the international financial system, judging from a series of recent advisories, sanctions actions, investigations, and assessments.
The United States on August 5, 2019, issued a new executive order to sanction the Venezuelan government, the latest U.S. attempt to pressure Nicolas Maduro to cede power to Juan Guaidó, whom the United States, the European Union, and most South American nations recognize as the legitimate leader of Venezuela.
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The United States on August 2, 2019, announced that it is imposing three new sanctions on Russia for the nerve agent attack that Russia carried out against Sergei Skripal and his daughter Yulia Skripal in the United Kingdom in 2018. The new sanctions will take effect August 26, 2019, amid mounting domestic pressure on the Trump Administration to enforce sanctions on Russia for the Skripal attack, and add to the extensive sanctions already imposed by the United States on Russia.
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The United States on June 4, 2019, tightened restrictions on travel to Cuba in response to Cuba’s destabilizing activities in the Western Hemisphere, particularly in Venezuela and Nicaragua, which both are subject to U.S. sanctions programs. The changes remove the widest exception to the U.S. ban on Cuba travel by U.S. persons, which was a key element of a wave of sanctions relief carried out by the Obama Administration in 2011.
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The EU Council on May 19, 2019, issued restrictive measures to deter and respond to cyber-attacks threatening the EU, its members, third countries, or international organizations. The measures provide the authority to block the assets of individuals and entities involved in cyber-attacks and enable enhanced coordination with the United States, which first authorized sanctions targeting similar activity on April 1, 2015. The EU’s new cyber measures mark the continued expansion of its global, conduct-based sanctions programs.
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The Treasury Department’s Office of Foreign Assets Control (OFAC) on May 23, 2019, sanctioned a network running online pharmacies and an associated payment processor, providing a revealing glimpse into how criminal organizations are exploiting retail payment networks to engage in illicit conduct.
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The Financial Action Task Force (FATF) in June 2019, plans to finalize new global standards that aim to ramp up AML/CFT regulation of virtual asset markets, part of a global wave of heightening regulatory expectations for virtual asset transactions. If FATF adopts the proposed standard, jurisdictions would need to require cryptocurrency exchanges to identify and record parties to virtual asset transactions just as other financial institutions do with wire transfers.
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The Treasury Department’s Office of Foreign Assets Control (OFAC) published its Framework for OFAC Compliance Commitments (“OFAC Compliance Guidance”) on May 2, 2019. The guidance is the most extensive, consolidated articulation of OFAC’s compliance expectations to date. Although it notably stops short of mandating a sanctions compliance program, the guidance provides a description of common compliance pitfalls seen in its enforcement actions to help companies in complying with sanctions. The guidance follows a recent spike in OFAC enforcement activity targeting a wide variety of compliance failures.
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The recent indictment of Huawei and its Chief Financial Officer on charges related to sanctions evasion and theft of trade secrets, was the latest salvo in the United States’ multi-pronged pressure campaign targeting China. Even if U.S.-China trade disputes are resolved in the coming weeks, institutions engaging in business with China, Chinese state-owned entities, or private individuals and entities subject to Chinese government influence should be cognizant of the escalating enforcement and regulatory risks.
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Throughout January 2019, international diplomatic and economic pressure on Venezuela’s Maduro regime has continued to increase, and the rapidly evolving situation – especially the dual claims to leadership of the government – presents increasingly complicated challenges for financial institutions and investors. The United States and several other countries recognized Venezuelan opposition leader Juan Guaidó as Venezuela’s “interim president” and announced new sanctions targeting Venezuelan corruption and the oil sector.
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U.S. authorities took three enforcement actions in December against U.S. broker-dealers, underscoring the importance of anti-money laundering (AML) risk management and suggesting closer scrutiny of AML compliance and the possibility of larger fines across the securities industry. Prosecutors announced the first-ever criminal Bank Secrecy Act (BSA) charges against a U.S. broker-dealer. Regulators fined UBS Financial Services Inc. and UBS Securities LLC $15 million and fined Morgan Stanley Smith Barney LLC $10 million.
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HIFPA II: New Sanctions Authorities Meet Familiar Constraints
November 6, 2018 |
On October 25, 2018, the President signed a new package of sanctions targeting Hizballah, the second time in three years that the United States has expanded and intensified U.S. sanctions authorities targeting the terrorist group. The sanctions authorized by the Hizballah International Financing Prevention Amendments Act of 2018 (HIFPA II) could affect correspondent banking worldwide if implemented.
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A series of cases in 2018 signal that European regulators are taking a more forceful approach to anti-money laundering (AML) regulation, at both the EU member state and EU levels. Examples of stronger oversight in the EU include a record fine against ING Bank N.V., multiple investigations of Danske Bank, and a censure of Malta’s Financial Intelligence Analysis Unit.
Actions at the EU level appear to indicate political will for closing gaps in supervision and enforcement across EU member states, suggesting that financial institutions in the EU will be subject to more stringent regulatory expectations. Financial institutions both within and outside the EU should ensure that their compliance programs can withstand stricter scrutiny, from EU regulators in the case of the former and from correspondents in the case of the latter. |
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The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) on October 4, warned financial institutions that Nicaraguan officials may try to move the proceeds of corruption through the United States following months of violence and the threat of additional sanctions. The United States has imposed sanctions against four Nicaraguan officials, all under Executive Order 13818, which implements the Global Magnitsky Human Rights Accountability Act, and the U.S. Congress is considering a new Nicaragua country program.
FinCEN said it “expects that senior foreign political figures connected to the regime of Nicaraguan President Daniel Ortega could react to the perceived threat of further unrest, potential sanctions, or other factors by moving assets that are the proceeds of corruption out of their accounts in Nicaragua or elsewhere.” FinCEN issued a Spanish language version of the advisory October 5, the third time this year that it has sought to mobilize banks in the region with a Spanish version of an advisory. |
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The U.S. Treasury Department is attempting to persuade foreign firms to reject business with Iran, based on terrorist financing and other risks in the wake of the President’s May 8, 2018 announcement, that the United States was withdrawing from the Joint Comprehensive Plan of Action (JCPOA). As part of this effort, the Treasury has accelerated the targeting of Iranian-related parties and interests through various sanctions programs.
These sanctions, coupled with “roadshows,” echo the campaign that Treasury initiated in 2006, to highlight the reputational and legal risks of doing business in Iran. The earlier campaign mobilized the private sector to withdraw from Iran on the basis of risk, independent of decisions made by companies’ home governments about whether to support U.S. sanctions targeting Iran, and it was followed by enforcement actions, including against foreign firms. |
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Iran Sanctions Re-Imposition Timeline
June 5, 2018 |
On May 8, 2018, President Trump issued a National Security Presidential Memorandum directing the Treasury Department and the State Department to begin re-imposing sanctions that were relieved under the Joint Comprehensive Plan of Action (JCPOA). Guidance issued by the Treasury Department’s Office of Foreign Assets Control (OFAC) describes two wind-down periods: one concluding in August 2018, and the other concluding in November
2018. After November 4, 2018, OFAC expects that all
U.S. nuclear-related sanctions lifted as part of the JCPOA will be “re-imposed and in full effect.”
OFAC has advised U.S. and third-country companies to use the time before sanctions are re-imposed to wind-down their activities with Iran. The provision or delivery of additional goods or services after the conclusion of the wind-down period “may result in the imposition of U.S. sanctions.” The following timeline identifies key steps that OFAC will take in this period. Some of these measures, such as the withdrawal and issuance of some licenses, do not have specific dates assigned to them yet. |
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On May 8, 2018, President Trump announced that the United States is withdrawing from the Joint Comprehensive Plan of Action (JCPOA) and re-imposing the nuclear sanctions that it suspended under the deal. The United States will re-impose the sanctions in two stages, with the first stage in August 2018 and the second stage in November 2018, creating a period of transition to allow for wind-down.
Non-U.S. financial institutions should watch for guidance from their home regulators regarding Iran. Nonetheless, financial institutions should start preparing for the re-imposition of U.S. sanctions. Even as they await further guidance from OFAC and their home regulators, non-U.S. financial institutions can begin positioning themselves for the reimposition of sanctions. |
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The United States, on April 19, 2018, announced that it had joined 15 other countries in a campaign to isolate the Venezuelan regime financially, activating the global anti-money laundering (AML) regime in the effort to combat Venezuelan government corruption and stem the humanitarian crisis in Venezuela. The AML and anti-bribery and corruption (ABC) initiative supplements sanctions that Canada, the EU, Switzerland, and the United States have imposed to target the Venezuelan government as the campaign to isolate Venezuela gains momentum in advance of Venezuela’s presidential election scheduled for May 20, 2018.
Sanctions, money laundering, and bribery and corruption risks are converging around the Venezuelan government. Financial institutions should review their Venezuela exposure – including through correspondent relationships, especially with banks in countries that have not joined the international effort to isolate the regime. They should consider their exposure alongside the FinCEN advisory and recent enforcement actions. |
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Regulators around the world are paying more attention to the risks associated with virtual currencies amid increasing trading volumes and a flood of new coins being offered for sale. Virtual currencies (VCs), which are nominally digital representations of value that function as a medium of exchange despite lacking legal tender status in any jurisdiction, have captured popular attention recently as prices have soared and crashed. Regulatory treatment on a global scale is neither set nor harmonized. Governments are exploring ways to cultivate innovation in financial and regulatory technologies, and are considering the official use of digital currencies. Still, facilitating virtual currency transactions presents high risks for virtual currency exchanges and banks that provide financial services to those exchanges.
Risk assessment and mitigation measures are necessary both for VC exchanges and for financial institutions with exposure to virtual currencies. Banks may be exposed to VCs beyond direct relationships with VC exchanges. |
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The April 6, 2018, U.S. designation of three Russian business executives makes doing business with their firms considerably more complicated. The addition of the executives to the Specially Designated Nationals (SDN) list does not result in automatic blocking of their firms under U.S. law, but the additions increase the risk of doing business with their firms, because the Office of Foreign Assets Control (OFAC) prohibits transacting with the designated executives directly or indirectly, including through intermediaries.
Although Gazprombank, VTB Bank, and Gazprom are not automatically designated under U.S. law as a result of the sanctions against their executives, the companies now present an elevated sanctions risk. The sanctions risks that arise from the designations are highly dependent on the specific facts and circumstances concerning the relationship. |
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The United States on April 6, 2018, escalated sanctions against Russia, adding seven Russian oligarchs, 12 companies that they control, and 17 senior Russian government officials to the Specially Designated Nationals (SDN) list. The Treasury Department used its sectoral sanctions authority to impose blocking sanctions for the first time, though it has previously blocked Russian entities under other authorities, and cited a broad set of malign Russian activity as predicate for the actions. The designations reach people very close to Russian President Vladimir Putin and include Russian corporations with large international footprints.
The April 6 actions highlight and heighten Russia-related risk for financial institutions. The use of Executive Order 13662 to block property – rather than merely prohibit dealings in debt and equity – are an escalation in the projection of financial power by the United States, and signal further escalation is possible if Russia continues to engage in malicious activity. The designations also increase the gap between the U.S. and EU Russia sanctions lists. |
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Recent high-profile media investigations into the widespread use of anonymous legal entities have sparked renewed scrutiny of these arrangements and could put pressure on financial institutions to take measures to prevent their abuse. Legislators in the United States, European Union, and United Kingdom are discussing proposals to make company formation more transparent by requiring disclosure of beneficial ownership. But collection and reporting of beneficial ownership information is likely to remain limited, even as regulatory expectations for financial institutions are increasing.
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Russia still poses a high sanctions risk even though the Trump Administration did not announce any new sanctions on the January 29, 2018 deadline, to implement a provision of the Countering America’s Adversaries Through Sanctions Act (CAATSA). The State Department on January 29, 2018, said that CAATSA was an effective deterrent and that additional sanctions were not necessary, according to press reports. In addition, the Treasury Department issued a congressionally mandated report naming wealthy and politically connected Russians but did not impose new sanctions on any of them. Nonetheless, the risk associated with doing business in Russia remains high because of existing U.S. and European sanctions and associated anti-money laundering requirements.
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The Trump Administration has begun to define a foreign policy paradigm around the concept of aggressive competition, particularly with respect to “revisionist powers” Russia and China, in two key national strategy documents released in the past two months. This approach, together with the administration’s policies and actions during its first year in office, suggest that sanctions and other financial tools are very likely to continue playing a leading role in advancing U.S. national security and foreign policy interests.
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United States Issues First Global Magnitsky Sanctions
January 4, 2018 |
On December 21, 2017, President Trump announced Executive Order 13818 to target serious human rights abuse and corruption around the world and implement the Global Magnitsky Human Rights Accountability Act. The Global Magnitsky Act and Executive Order 13818 represent a milestone in the United States’ use of conduct-based sanctions authorities, enabling it to target corruption and human rights abuse anywhere in the world. This standalone, global authority builds upon the original Russia and human rights-focused Sergei Magnitsky Rule of Law Accountability Act of 2012 and other existing country-specific programs that included similar, conduct-based designation criteria.
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Executive Order 13810 Intensifies U.S. Sanctions Targeting North Korea
September 26, 2017 |
The United States last week dramatically expanded the scope of its North Korea sanctions, making financial institutions that participate in North Korea-related trade vulnerable to losing their access to the U.S. financial system. Executive Order 13810 of September 21, 2017, authorizes the Treasury Secretary to impose new sanctions and to identify non-U.S. bank accounts that are controlled by North Korean persons or used to transfer funds for a North Korean person. While continuing to maintain robust sanctions screening systems, financial institutions should review and adjust their AML programs with an eye toward detecting possible North Korea-related activity and conducting enhanced due diligence on unusual transactions.
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DFS Rebuke of Pakistani Bank's New York Branch Implicates Head Office
September 14, 2017 |
The New York Department of Financial Services (DFS) and the New York branch of Pakistan’s Habib Bank Limited (HBL) last week entered into consent order after DFS found that the bank’s compliance function is “dangerously weak” and identified strategic deficiencies in the bank’s enterprise-wide risk management, including at the head office in Karachi. As a part of the consent order, HBL agreed to pay a $225 million fine, illustrating both the regulatory risks associated with foreign banks’ U.S. branches and the reputational risks that arise when a U.S. regulator issues an enforcement action against a U.S. branch that implicates the internal controls at the head office. HBL also agreed to close its New York branch, but DFS will continue its probe. Banks – especially U.S. branches of foreign banks – should draw three key lessons from the enforcement action against HBL.
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United States Ramps Up Financial Pressure on Venezuela
August 28, 2017 |
A new Executive Order, along with four general licenses and a number of Frequently Asked Questions relating to the new sanctions, targets the debt and equity of the Government of Venezuela, the debt of Petroleos de Venezuela, S.A. (PdVSA), and a number of other transactions related to payments to the Government of Venezuela and activities of entities it owns or controls. These new actions build on previous rounds of sanctions designations undertaken by the Trump Administration, which to this point have only blocked property of individuals closely associated with the regime of Venezuelan President Nicolas Maduro. This Policy Alert details the five primary prohibitions contained in the Executive Order, “Imposing Additional Sanctions With Respect to the Situation in Venezuela,” discusses the four general licenses, and provides an assessment of the implications of these new sanctions for financial institutions.
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As U.S. and European regulators have imposed significant fines on financial institutions for violating sanctions and anti-money laundering (AML) regulations over the past decade, many financial institutions have concluded that servicing high-risk clients and jurisdictions is simply not worth the reward. This increased regulatory risk has helped lead to "de-risking," a blunt reduction in exposure for financial institutions that also undermines efforts to maintain and increase legitimate financial inclusion. De-risking has not been uniform, and reconsideration of risk exposure cannot be explained solely by reactions to a more complicated and challenging financial crime and sanctions environment. Better understanding this landscape — and where it is headed — will help our clients and partners determine the best way to address the pressures to limit risk.
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As Iran attempts to reintegrate into the world economy following Implementation Day, many challenges remain for companies considering doing business in the Islamic Republic, with Iranian counterparties, or supporting customers operating in Iran. Dealing with the spectrum of risk — financial crime, regulatory, reputational, and policy — in the Islamic Republic will require that U.S., European, Asian, Middle Eastern, and other firms clearly understand the patchwork of sanctions that will remain in place on the country, as well as many of the systemic issues impacting various Iranian business sectors, such as corruption. Companies must also factor the risk that sanctions may “snap back” in the medium or long term into their business decisions.
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