International financial sanctions: how to work under them successfully

13 February 2018, Bachir El Nakib (CAMS) Senior Consultant Compliance Alert LLC

Economic sanctions have fast become a favourite international foreign policy tool and are now the international community's de facto response to "rogue" or "troubled" states. This article looks at how sanctions affect banks and other FIs and how to work under them successfully.  

What do sanctions consist of? 
Economic sanctions usually consist of trade sanctions and financial sanctions. This article is about financial sanctions but, briefly, trade sanctions generally take the form of restrictions on the sale and purchase of particular goods and services, such as arms embargoes. Trade sanctions are particularly relevant to banks in the context of their trade finance business. 

At the core of financial sanctions is an asset freeze on specifically targeted persons. Although the scope of the asset freeze may differ between different international and national regimes, it is usually made up of two parts: a freeze of the "funds and economic resources" of designated persons; and a prohibition on making "funds and economic resources" available to them. The effect will generally be that all business with a designated person should cease. In short, therefore, banks should not make payments to or participate in transactions involving sanctioned parties unless the payment/transaction has been licensed. 

International and national regimes
Sanctions usually begin at United Nations (UN) level in the form of a Security Council Resolution, but because Security Council Resolutions require a majority vote and five out of 15 members have the power of veto, UN sanctions are usually the most diluted, reflecting political compromises. Once a Security Council Resolution has been adopted, it is for each of the 192 UN member states to implement it into their national legislation. Precisely how they do so is a matter for them and this can often lead to inconsistency as to how the sanctions are implemented. 

To implement UN sanctions at EU level, the EU adopts a decision and accompanying regulation. EU Regulations are directly applicable and effective in all EU member states, but they require national legislation to provide effective penalties for breaches. The EU is able to introduce sanctions much more quickly than the UN simply because the interests of the EU member states are (generally) more aligned. The EU therefore adopted sanctions earlier this year against Egypt, Syria and Tunisia without action being taken by the UN. For the same reasons, where EU sanctions implement UN sanctions, the EU sanctions are usually stronger and more comprehensive. 

The U.S. is often at the vanguard of sanctions regimes. U.S. sanctions may also have extraterritorial reach. This means that a global risk management approach is necessary for any business with a nexus to the U.S. Further, while official sanctions regimes are one thing, perhaps far more powerful has been the intense lobbying efforts by the U.S. to persuade businesses to stop doing business with Iran. 

Closer to home, the UK implements UN and EU financial sanctions by way of statutory instruments (SI) made by HM Treasury. so that it is essential to study the terms of the relevant SI as well. 

Licensing transactions
All sanctions regimes contain exemptions whereby, notwithstanding an asset freeze, certain transactions (such as a pre-sanction contractual obligation or transaction, or transactions necessary to satisfy basic needs, legal and professional fees) can proceed if licensed by the appropriate authorities.

It is important to understand that there is no single place which can award a licence which will afford protection everywhere. While a licence from the Asset Freezing Unit of HM Treasury in the UK should in theory be sufficient protection throughout Europe, it is sometimes not as FIs based on highly conservative advice from their advisors in different EU jurisdictions are advised on occasions to get comfort from other EU regulators. What is more, even if the licence is sufficient comfort throughout Europe, if there is a U.S. angle, e.g., U.S. dollars are involved, a U.S. licence from Office of Foreign Assets Control (OFAC) is likely to be necessary and, depending on the politics, this can be a completely different ball game. 

Other potential consequences of breaching sanctions
Penalties in this area are very serious and potentially business-critical, particularly where the U.S. is involved. For instance, a foreign FI's entire access to the U.S. financial system can, in effect, be switched off if it is held to have breached Iranian sanctions. If that were not enough, it can also be fined massively and individuals can be imprisoned for up to 20 years. There are many examples of large-scale fines (which can run to hundreds of millions of dollars) being imposed by the U.S. Treasury. 

While much of the prosecution action has occurred in the U.S., the risks in the UK are also very serious. In addition to penalties under the Money Laundering Regulations, breach may lead to fines and up to two years' imprisonment for individuals. 

Practical implications and advice

1. Do not underestimate the importance of this whole area. Some hugely important foreign policy objectives are being pursued though sanctions. Senior management at FIs need to understand this and to ensure that the area has appropriate priority and resource. 

2. FIs must have a very well-designed sanctions monitoring and compliance programme. Those involved in establishing and monitoring procedures and processes in this area should read the FSA's decision in relation to RBS. The right IT systems and proper training should be essential components of a sanctions monitoring and compliance programme. 

3. Best practices require that business should develop, implement and operate a system of procedures and controls to identify any potential connection, direct or indirect, to sanctioned entities. This system should be proactive; and to address fully the risk of exposure, it should incorporate regular collection, synthesis and review of all credible public information, not just governmental lists of prohibited parties. Commercially available databases can be highly efficient to screen customers, clients, counterparties and others. Regulators, political leaders and the media are holding businesses accountable regarding what they consider those businesses should know, not just what they actually know. 

4. It is critical that policies and procedures are monitored and reviewed as things evolve, as interpretations develop, as experiences emerge and therefore risks change. 

5. Firms need to be very aware of the long arm of U.S. sanctions. If there is a U.S. nexus, e.g., U.S. dollars are involved at any stage or an entity has a U.S. connection, U.S. sanctions could be relevant. 

6. Firms should monitor very closely what is happening in the U.S. whose news flows (OFAC press releases, testimonies to congressional committees of relevant individuals) are very important; they should be part of an early warning system. 

7. Sanctions clauses are becoming increasingly common. They warn counterparties that a sanction may prohibit a bank from, say, dealing with specific countries, persons or assets, and may give the bank discretion not to honour contractual obligations. 

8. Firms should arm themselves with the right advisors. Some complex issues are involved, and these need to be fully understood and appreciated if risks are to be managed; it may be necessary to interact with the authorities. 

9. Finally, firms should look out for the opportunity to secure a competitive advantage by being fully on top of the risks, having the right advice and serving their clients. Some people in this area are refusing to do things because they are scared and because they do not really appreciate what they can and cannot do. There is an opportunity to differentiate.

Sanctions regime	By?
Afghanistan	UN, EU, UK, US
Al Qaeda	UN, EU, UK, US
Belarus	EU, US
China	EU
Cuba	US
Democratic Republic of Congo	UN, EU, UK, US
Egypt	EU, UK
Eritrea (to date, no targets have been sanctioned)	UN, EU
Republic of Guinea	EU, UK
Iran (human rights & nuclear proliferation)	UN, EU, UK, US
Iraq	UN, EU, UK, US
Ivory Coast	UN, EU, UK, US
Lebanon and Syria	UN, EU, UK, US
Liberia	UN, EU, UK, US
Libya	UN, EU, UK, US
Myanmar/Burma	EU, UK, US
Narcotics trafficking	US
North Korea	UN, EU, UK, US
Somalia	UN, EU, UK, US
Sudan	UN, EU, UK, US
Syria	EU, UK, US
Terrorism and terrorist financing	UN, EU, UK, US
Transnational criminal organisations	US
Tunisia	EU, UK
Former Federal Republic of Yugoslavia and the Federal Republic of Serbia	EU, UK
Zimbabwe	EU, UK, US

 

 

 

 

 

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