What are sanctions?

Sanctions are measures imposed by countries or groups of countries on others to influence behaviour, enforce international norms or achieve policy objectives. These measures can include economic penalties, such as trade restrictions, and also encompass a range of actions like diplomatic, military or environmental sanctions. Their goals range from conflict resolution and countering terrorism to promoting human rights and non-proliferation. Sanctions are a key tool in international relations, used to exert pressure and bring about desired changes in policy or behaviour of the targeted entity.

Sanctions and the finance industry

The landscape of sanctions compliance specifically in the financial industry within Europe and the UK has undergone significant changes over the past few decades. Traditionally, sanctions were primarily focused on the financial sector. However, recent developments have expanded the focus to include the corporate sector as well, with an increasing number of non-financial entities being targeted for failing to comply with sanctions regulations.

In recent years, particularly following events like the Russian invasion of Ukraine in February 2022, there has been a notable shift towards a more cohesive and stringent approach to sanction imposition and enforcement. This shift has been characterised by greater cooperation among global regulators, including the US, UK, EU and other nations such as Canada and Australia. These changes are reflected in the UK by the Sanctions and Anti-Money Laundering Act of 2018 and the subsequent amendments introduced by the Economic Crime Act (ECA).

Key aspects of the evolving sanctions regime in the UK include:

Greater flexibility and urgency: The ECA allows for the expedited imposition of sanctions and the ability to react quickly to developments without having to determine whether there are ‘good reasons to pursue’ their given purpose.

Strict liability for sanctions breaches: The ECA has introduced a ‘strict liability test’ for civil monetary penalties arising from sanctions breaches, effective from June 15, 2022. This means that a person’s intent, knowledge or suspicion is irrelevant to whether the Office of Financial Sanctions Implementation (OFSI) can impose a civil penalty.

Enhanced reporting powers: The ECA now enables OFSI to publicly name and shame a person who it has found has breached sanctions, adding a reputational risk to identifiable misconduct. (See more details below)

Limiting damages: The ECA limits the courts’ power to award damages against the government for unjustified sanctions designations to cases where a decision was made in outright ‘bad faith’.

As sanctions continue to evolve, financial institutions face the challenge of complying with differing sanctions requirements across multiple jurisdictions. The Financial Conduct Authority (FCA) has launched new reporting platforms to encourage firms to report breaches of sanctions and weaknesses in their internal policies and procedures.

These developments indicate a more proactive stance by UK regulators on sanctions compliance and the efficacy of organisations’ systems, controls and policies related to sanctions. Financial institutions now have to navigate this complex and dynamic landscape, ensuring that they remain compliant with the varying sanctions regimes and their specific requirements.

Violation of sanction regulations

Financial institutions that violate sanctions regulations can face severe penalties and reputational damage. The consequences of such violations are multifaceted, including financial, operational and legal repercussions.

Monetary penalties for violating sanctions can be substantial, with no specific threshold for the penalty liability. Depending on the severity and nature of the violation, financial penalties can range to millions of pounds/dollars. These penalties are typically calculated based on the nature and extent of the violation and can also include additional interest charges.

Beyond financial penalties, violating sanctions can lead to civil liabilities. Entities may lose operational rights, face restricted trade activities, or even be permanently banned from operating within certain jurisdictions. In terms of legal consequences, individuals and groups involved in such violations could face substantial terms of imprisonment. Criminal liabilities might include stringent monitoring during imprisonment and thorough investigations.

The reputational damage for financial institutions can be equally severe. Being associated with sanction violations can lead to a loss of trust among clients, partners and the general public. This can result in a long-term negative impact on the institution’s brand and its ability to attract and retain customers.

Overall, the ramifications of sanctions violations underscore the importance for financial institutions to maintain robust compliance programs. This involves regular screening of transactions and business relationships against relevant sanctions lists and ensuring adherence to all applicable regulatory requirements.

Enhancing compliance

Financial institutions can significantly enhance their sanctions compliance efforts through several strategic measures:

Tailored compliance programs: There is no one-size-fits-all approach to sanctions compliance. Institutions must develop compliance programs tailored to their specific business features, including the jurisdictions they operate in and the nature of their operations. This requires a clear understanding of the applicable regulations, including those of the United Nations, the European Union, the UK, or, for example, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC).

Rigorous due diligence: Effective compliance hinges on understanding not only direct transaction partners but also beneficial owners and any connections to sanctioned entities. This means conducting thorough due diligence to identify any potential links to sanctioned individuals or companies. Financial institutions must be diligent in researching and sourcing data to ensure compliance with complex and overlapping sanctions regimes.

Decentralised compliance function: Sanctions compliance should be integrated across various departments and branches of the institution. This decentralised approach allows for more effective monitoring and enforcement of regulatory requirements in each jurisdiction. It also ensures that all entities within the institution adhere to equivalent compliance standards.

Investment in technology and process optimisation: The use of advanced technology, such as machine learning and artificial intelligence, can streamline the process of identifying and prioritising sanctions alerts. This technology can reduce the number of false positives and improve the efficiency of compliance processes. Large institutions, in particular, can benefit from the digitalisation of legacy systems to enhance their compliance capabilities.

Culture of compliance and training: Cultivating a culture of compliance throughout the organisation is crucial. Regular training for employees on compliance topics and targeted sessions for staff in specific business areas can significantly contribute to the overall effectiveness of the sanctions compliance program. All staff should understand the importance of their role in maintaining compliance.

Navigating an evolving sanctions environment

The landscape of financial sanctions is constantly evolving, presenting significant challenges for financial institutions. To navigate this complex environment and avoid penalties and reputational damage, these institutions must adopt tailored compliance programs, conduct rigorous due diligence, invest in technology for efficient monitoring, and foster a culture of compliance. Adapting to the dynamic nature of sanctions regimes is crucial for maintaining operational integrity and fulfilling regulatory obligations.