In February, Russia invaded Ukraine, bringing down upon Moscow a regime of sanctions mostly from Western countries. What does it mean when sanctions are imposed on an individual, class of persons, entity or country?
The Association of Certified Anti-Money Laundering Specialists (ACAMS) defines sanctions as “punitive or restrictive actions taken by individual countries, regimes, or coalitions with the primary purpose of provoking a change in behavior or policy. Sanctions can restrict trade, financial transactions, diplomatic relations, and movement. They can be specific or general in their implementation and enforcement. Sanctions are also referred to as restrictive measures.”
Sanctions can be imposed by one country (unilateral) or by multiple countries (multilateral) on an individual, class of persons, entity, or country to influence their actions.
For instance, under the United Nations Charter, the Security Council can take action to maintain or restore international peace and security under Chapter VII of the charter. The Security Council is composed of 15 Members. The five permanent members are China, France, the Russian Federation, the UK, and the US. The 10 non-permanent members are elected for two-year terms by the General Assembly. Sanctions that have been approved are binding on all member states.
The European Union (EU) implements all sanctions adopted by the UN Security Council. In addition, the EU may also decide to impose sanctions on its own initiative (‘EU autonomous sanctions’). EU sanctions apply within the jurisdiction of the EU, to EU nationals in any location and to companies and organizations incorporated under the law of a member state. Enforcement must be undertaken by the member states.
Moreover, the Office of Foreign Assets Control (OFAC) of the US Department of the Treasury administers and enforces economic and trade sanctions based on US foreign policy and national security goals against targeted foreign countries and regimes, terrorists, international narcotics traffickers, those engaged in activities related to the proliferation of weapons of mass destruction, and other threats to the national security, foreign policy or economy of the US. OFAC publishes lists of individuals and companies owned or controlled by, or acting for or on behalf of, targeted countries. It also lists individuals, groups, and entities, such as terrorists and narcotics traffickers designated under programs that are not country-specific.
The Export Control Organization (ECO) of the UK licenses controlled goods and goods caught by a country-specific embargo, while Her Majesty’s Treasury licenses funds or assets.
Taking the war in Ukraine as an example, the US and the UK have both imposed additional sanctions on Russia, which include: banning new inbound investment, as well as severe sanctions on two Russian financial institutions (Alfa Bank and Sberbank), on major state-owned enterprises, and on government officials and their family members.
As part of the UK’s efforts to isolate Vladimir Putin, it announced sanctions against seven oligarchs. Roman Abramovich, the owner of Chelsea Football Club, had his assets frozen, and was prohibited from transacting with UK individuals and businesses, and barred from travel. Abramovich’s one-time business partner, industrialist Oleg Deripaska, was also similarly sanctioned.
Another notable example is the long-time sanctions regime imposed on North Korea due to the country’s continuing pursuit of its nuclear and missile program. Executive Order 13722 blocks the Government of North Korea and the Workers’ Party of Korea; prohibits the export and re-export of goods, services (including financial services), as well as technology from the US, or by a US person to North Korea; and prohibits new investment in North Korea by a US person.
Sanctions can further be classified into four types: diplomatic, financial, trade and travel. A diplomatic sanction restricts or suspends membership in international organizations and diplomatic visits that affect the ability of the target to interact with other countries. It can also limit access to financial aid or loans. Financial sanctions can involve account seizures or freezing. Trade sanctions, sometimes called embargoes, limit the import/export of specific goods (e.g., arms, oil or diamonds) or services (e.g., technology, training, financing). Travel sanctions restrict the mobility of individuals on the list (preventing them from traveling to and through certain countries). It can extend to any asset including bank accounts to pay for travel.
As payment transactions are predominantly the only record that can detect a potential sanctions violations, a financial institution’s role is crucial in discerning the circumstances that warrant sanctions. Financial institutions also have the right to seize or freeze assets to prevent payments to certain individuals.
Thus, a financial institution must have a robust Anti-Money Laundering (AML) compliance program in place which should be based on the following pillars to combat financial crime: internal policies, procedures and controls; designation of an AML officer; employee training; independent testing; and customer due diligence (CDD). As part of CDD, financial institutions must identify and verify the identity of the customer as well as the parties that own or control them, their transactions and the applicable sanctions. The customer’s and parties’ name would need to be screened against the sanctions list. These are done through intelligence gathering, checking of transactions with violations, and filing of suspicious activity reports. A good AML compliance program will help financial institutions determine any involvement that a customer has with a sanctioned target or if the customer itself is a sanctioned individual or entity. Lastly, there should be a check done on the customer’s transactions to make sure that they are not dealing with sanctioned individuals or entities. When done properly, it should help prevent financial institutions from violating sanctions.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.
Joanne Reyes is a manager at the Financial Crime practice of PricewaterhouseCoopers Consulting Services Philippines Co. Ltd., a Philippine member firm of the PwC network.
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