On September 30, 2022, the US Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) published “Sanctions Compliance Guidance for Instant Payment Systems” (the “Guidance”). The Guidance underscores the importance of a risk-based approach to managing sanctions risks related to payment technologies such as instant payment systems.
The availability of funds in real time poses a challenge for financial institutions that seek to comply with US sanctions regulations. OFAC recommends that developers of instant payment systems incorporate sanctions compliance considerations in the design and development processes and add compliance features and tools that enable participants and users to maintain an effective sanctions compliance program. Such compliance features and tools may include (1) a messaging system among participating financial institutions to effectively communicate sanctions concerns; (2) an exception to automatic processing to allow investigation of potential sanctions concerns; and (3) minimum sanctions compliance expectations among members of instant payment systems to mitigate overall sanctions risk.
OFAC recommends that all US persons, including US banks and financial institutions, employ a risk-based approach that incorporates at five essential components of compliance: (1) management commitment; (2) risk assessment; (3) internal controls; (4) testing and auditing; and (5) training. Because US banks and financial institutions have unique circumstances and may use different technologies, OFAC recommends that each institution conduct its own assessment to determine effective sanctions compliance controls.
Risk Factors Relevant to Instant Payment Systems
The Guidance highlights the following factors as particularly relevant in assessing compliance risks related to instant payment systems:
- Domestic vs. Cross Border Payment Systems
The domestic or cross border nature of payment systems may be relevant in assessing the sanctions risk of instant payment systems. Domestic instant payment systems generally pose lower sanctions risk than cross border instant payment systems because transactions are limited to accounts from US banks. OFAC expects that US banks already perform risk-based due diligence on their customers, including diligence to identify any potential sanctions nexus, in order to comply with rigorous US regulatory requirements and examinations. Institutions that utilize cross border payment systems should assess sanctions exposure from non-US banks, which may not be subject to similar regulatory requirements and examinations.
- Nature and Value of Payment
The nature and value of payments may be relevant in assessing the sanctions risk of instant payment systems. Payments that are consistent with previous customer behavior or that align with previously investigated and approved sanctions implications generally pose lower sanctions risk than payments that appear inconsistent with previous customer behavior. For example, significantly higher value payments or payments made to first-time foreign persons may pose sanctions risks.
- Emerging Sanctions Compliance Technologies and Solutions
Emerging sanctions compliance technologies and solutions may be helpful in assessing the sanctions risk of instant payment systems. OFAC highlights artificial intelligence tools and other innovative solutions that leverage information sharing between financial institutions, which may improve sanctions screening processes and reduce false positives. OFAC encourages the use of such tools, where appropriate, to mitigate sanctions risk in the context of instant payments.
The authors acknowledge the assistance of Alexandra Kumar with the preparation of this blog post.