Sanctions Essentials - What is a Risk Assessment?

An organization’s Sanctions Compliance Program (SCP) should be a seamless part of a broader ethics and compliance strategy. The OFAC (Office of Foreign Assets Control) framework provides five essential components of sanctions compliance that should be included in a comprehensive compliance program. These components are:

• Management commitment: The commitment of senior management is critical in creating a culture of compliance within the organization. Management should ensure that the compliance program is adequate, effective, and fully implemented.

• Risk assessment: A risk assessment should be conducted to identify and assess the risks associated with the organization's operations, customers, and counterparties. This assessment should take into account the organization's products and services, geographic locations, and business partners.

• Internal controls: Effective internal controls should be implemented to ensure compliance with sanctions regulations. These controls should include policies and procedures, training and awareness, and monitoring and testing.

• Testing and auditing: The compliance program should be subject to periodic testing and auditing to ensure its effectiveness. The results of these tests should be used to improve the compliance program and address any deficiencies.

• Training: Any training program should be available to all appropriate employees at least annually and should provide job-specific knowledge, communicate sanctions compliance responsibilities, and hold employees accountable for training.

These five components are interrelated and should be implemented in a coordinated manner to ensure an effective sanctions compliance program.

Risk Assessment Components

The risk assessment element of a sanctions compliance program is critical in identifying and mitigating potential risks associated with a company's operations, customers, and counterparties. OFAC has outlined specific expectations and definitions for conducting a comprehensive risk assessment.

Firstly, OFAC expects companies to have a thorough understanding of the nature and scope of their operations, including the products and services they offer, geographic locations they operate in, and their business partners. This understanding is essential in identifying potential sanctions risks.

Next, companies should assess the specific risks associated with their operations, customers, and counterparties. These risks may include the potential for engaging in transactions with individuals or entities subject to sanctions, or conducting business in countries subject to economic sanctions.

The risk assessment should also consider any internal controls the company has in place to mitigate risks. This may include policies and procedures, training, and awareness, and monitoring and testing.

OFAC defines a risk-based approach as one that focuses resources on areas of greatest potential risk. This means that companies should prioritize their efforts to mitigate the highest risks first. OFAC also emphasizes the importance of ongoing monitoring and reassessment of risks, as the sanctions landscape can change rapidly.

In addition, OFAC expects companies to document their risk assessment process and findings. This documentation should include a description of the methodology used, the results of the assessment, and any actions taken to mitigate identified risks.

Overall, the risk assessment component of a sanctions compliance program is critical in identifying and mitigating potential sanctions risks. By conducting a thorough and ongoing risk assessment, companies can ensure they are taking a risk-based approach to sanctions compliance and are able to identify and mitigate potential risks in a timely and effective manner.

OFAC’s complete guidance on risk assessments is as follows:

"A comprehensive risk assessment includes an understanding of the company’s business from a commercial perspective, including its products or services, customers, counterparties, transactions, and geographic locations. The risk assessment should consider the potential risks associated with the company’s customers, such as the countries or industries in which they operate, as well as the company’s products or services and the geographic locations where they are offered or provided. The risk assessment should also consider the company’s counterparties and the geographic locations in which they are located. A risk assessment should include consideration of any sanctions evasion techniques that may be employed, such as through the use of front companies or other intermediaries, as well as the potential for exposure to other types of illicit activity, such as money laundering, fraud, or terrorism financing."

https://home.treasury.gov/policy-issues/financial-sanctions/faqs/847