When banks issue letters of credit (LCs) involving parties or goods from sanctioned areas, they need to take extra precautions. Conducting proper due diligence can help avoid penalties and legal issues down the road. Here's an overview of key due diligence steps banks should take when handling LCs with ties to sanctioned areas:

Screen All Parties Against Sanctions Lists

Banks must screen the applicants, beneficiaries, and any other parties involved against relevant sanctions lists like OFAC's SDN list. This helps identify prohibited parties or transactions early on. Sanctions lists change frequently, so screening should occur at multiple points - when receiving the LC application, before issuing or confirming the LC, before making any payments, etc. Automated screening systems can help streamline this process.

Conduct Enhanced Due Diligence on High-Risk Areas

LCs involving certain countries or regions deemed high-risk for sanctions violations warrant extra scrutiny. For example, companies operating in Syria have faced issues like Lafarge did. For high-risk areas, banks should:

Gather more details on the underlying trade transaction
Verify goods aren't dual-use or prohibited
Review ownership structures for front companies
Require extra certifications from applicants

The goal is understanding who the parties are and what they're actually up to.

Watch for Red Flags

Certain red flags may indicate sanctions evasion or other suspicious activity:

Complex corporate ownership structures
Shell or front companies
Goods transiting through multiple countries
Unusual shipping routes
Discrepancies in documents

Banks need to investigate any red flags and decide if transactions should proceed. Having clear escalation procedures is key.

Document Due Diligence Steps

Keep detailed records of all due diligence performed, including:

Party and transaction screening results
Background research conducted
Any enhanced due diligence steps taken
How red flags or issues were resolved

Thorough documentation provides an audit trail demonstrating the bank's compliance efforts.

Monitor for Changes

Sanctions lists and geographic risks evolve constantly. Banks should:

Screen parties/transactions again before final payments
Update screening filters to catch new designated parties
Review due diligence procedures periodically

Regular monitoring helps reflect new developments that may impact LCs.

Conduct Ongoing Staff Training

Make sure LC operations, compliance, and other relevant staff understand:

Sanctions regulations and risks
The bank's due diligence policies and procedures
How to identify and escalate red flags

Training ensures personnel have the knowledge to handle LCs properly.

Assess and Address Risks in M&A Deals

Mergers and acquisitions involving high-risk areas also require sanctions due diligence. The Lafarge case highlights this. Banks should:

Review target's location, partners, supply chains, etc. for sanctions exposure
Perform risk-based due diligence on all parties
Develop integration plan to strengthen compliance

Proactively evaluating sanctions risks allows informed decisions on deals.

Watch for Virtual Currency Red Flags

Virtual currencies are an emerging sanctions evasion method. Banks should watch for:

Parties connected to blocked digital currency addresses
Use of mixers and tumblers to obscure transactions
Unexplained funds from exchanges or adminstrators

Enhanced due diligence like verifying wallet addresses can help mitigate risks.

Implement Strong Compliance Programs

A solid sanctions compliance program enables effective due diligence. Key elements include:

Documented policies and procedures
Ongoing training initiatives
Experienced staff overseeing compliance
Robust auditing and reporting
Escalation protocols for red flags

A strong program provides the foundation for managing sanctions risks.

Seek Legal Guidance When Needed

Sanctions regulations are complex. Consulting external legal counsel is prudent when:

Facing unclear or ambiguous situations
Transactions involve high-risk parties or locations
Significant red flags remain unresolved

Experienced attorneys can help interpret regulations and provide advice on handling tricky LCs.

Stay Up-To-Date on Regulatory Changes

Sanctions rules frequently change. Banks need to:

Monitor OFAC/regulator announcements for updates
Review new legislation, directives, advisories, etc.
Update policies, procedures, and training accordingly

Keeping current ensures compliance with the latest requirements.

Conclusion

Conducting proper due diligence on LCs linked to sanctioned regions requires vigilance. But banks can manage the risks by screening parties, monitoring transactions, documenting processes, and staying up-to-date on regulations. Robust know your customer and compliance programs provide a solid foundation for this effort. With sufficient care and caution, banks can handle these complex LCs while still meeting their compliance obligations.

Due Diligence on LCs Involving Sanctioned Areas