On 31 August 2023, the Monetary Authority of Singapore ("MAS") published a circular setting out additional guidance for financial institutions concerning the detection and management of sanctions-related risks.

This note summarises the key points from the circular.

  1. Introduction

MAS generally expects financial institutions to have in place processes to effectively detect and manage sanctions-related risks. In particular, financial institutions are expected to be up-to-date on developments relating to all sanctions, including unilateral sanctions imposed by other jurisdictions that can impact its operations and customer relationships.

Through its circular, MAS has provided additional guidance in two key areas, which may enhance a financial institution's ability to detect and manage sanctions-related risks.

  1. Strong board and senior management oversight of sanctions-related risks

MAS expects financial institutions to have in place an established governance process for its board and senior management to exercise oversight over sanctions-related risks. In this regard, MAS has outlined four key expectations for a sound governance process.

Firstly, the board and senior management should clearly define the financial institution's risk appetite in relation to its sanctions-related risks, including indirect exposure to sanctioned persons, activities or jurisdictions. In determining the financial institution's approach to unilateral sanctions imposed by other jurisdictions, the board and senior management should assess the reputational, legal and operational risks and carefully balance their potential impact on its business operations (including those in other jurisdictions) against that from fast developing and/or escalating sanctions against any specific jurisdictions.

Secondly, the board and senior management should set clear roles and responsibilities within the financial institution in relation to detecting, monitoring, and managing sanctions-related risks. The relevant functions should have adequate resources to perform the role and staff should be adequately trained to identify sanctionsrelated typologies.

Thirdly, there should be an established risk metric to help the board and senior management regularly detect and monitor any significant sanction-related risk exposures and manage such risks on an ongoing basis.

Lastly, there should be a defined escalation process so thatthe first and second line functions can surface material sanctions-related risk events to the board and senior management expediently. Such material risk events should include situations such as new sanctions being imposed on a jurisdiction that the financial institution is operating in, and new sanctions-evasion cases and typologies being detected by the financial institution.

  1. Continuously strengthening sanction-risk detection capabilities

MAS has observed that some financial institutions in the banking sector retrospectively review wire transfer transactions to proactively identify existing customers that previously transacted with sanctioned persons, for closer review (the "lookback mechanism"). This has enabled such financial institutions to detect potentially higher risk customers or transactions that seek to evade traditional payment screening controls by layering their transactions through third-party accounts.

In this regard, MAS recommends that financial institutions take a risk-based approach when instituting a lookback mechanism, taking into account the materiality and impact of different sanctions on its business operations, as well as reputational, legal and operational risks.

MAS also recommends that financial institutions establish clear baseline parameters for its lookback mechanism. This includes:

  • Setting clearly defined trigger events for the lookback mechanism (e.g., new designations of persons that present higher sanctions risks to the financial institution).
  • Defining the scope of transactions that are subjected to the lookback mechanism and the period of It should minimally cover the financial institution's corporate customer accounts and transactions occurring at least 12 months before the date of designation.
  • Ensuring that the lookback mechanism is initiated soon after the trigger event. The lookback mechanism review should be completed no later than two months after the date of designation.
  • Ensuring that deviations from the baseline are escalated to the board and senior management.
  1. Conclusion

The circular provides additional guidance on MAS' supervisory expectations concerning a financial institution's anti-money laundering and countering the financing of terrorism ("AML/CFT") controls. It also emphasises important role that the board and senior management has to play in overseeing and managing sanctions-related risks. Financial institutions should therefore examine their AML/CFT controls to ensure that they align with MAS' supervisory expectations set out in the circular.

A copy of the circular by MAS can be found here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.