• Breachingasanctionsregimeisa • Awiderangeofnormalbusiness • Theassumptionthatmultilateral • Enhancedchecksandscreeningare INSIGHT: UN SANCTIONS VIOLATIONS AVOIDING THE PITFALLS International sanctions regimes represent a significant compliance challenge, requiring an enhanced approach to standard AML procedures. Harriet Territt explains how to avoid inadvertent breach A s the global economy continues the Security Council to take enforcement IN Brief to emerge from recession, there measures to maintain or restore international is an increasing focus on the role peace and security, including imposing of regulation in maintaining stable economic, trade or targeted sanctions. sanctions operate identically in every financial markets and systems. Concurrently, The serious nature of the policy behind jurisdiction is a common cause of regulators have signalled a more proactive, international sanctions is reflected in the way inadvertent breach intensive approach to supervision and they are implemented around the world. enforcement, for example in the policing A range of specific measures fall under the of international sanctions, following the general heading of “financial sanctions” criminal offence in the UK – maximum announcement of several high-profile and they vary in severity and impact – the term seven years in prison investigations and settlements, particularly in most comprehensive prohibit any transfer of the UK and US. funds to a sanctioned country and require all assets of a government, corporate entities activities may infringe a sanctions Serious impact and residents of the target country to be regime Sanctions are an unusual regulatory creation. frozen in jurisdictions where the sanctions Most regulation looks inward, focusing on are effective. Given the very serious impact of preventing risky or inappropriate behaviour such a comprehensive package on the lives advisable and may offer a defence within an organisation. In contrast, sanctions of ordinary people in the target jurisdiction, are a tool of foreign public policy aimed at a more common approach is to put in place preventing behaviour condemned by the targeted asset freezes and/or investment bans international community, or encouraging a on named individuals/entities. These are often change of behaviour in a targeted regime. combined with export or import bans on Increasingly, they are used to prevent the certain types of goods and visa bans or financing of terrorism. travel restrictions. The majority of sanctions are multilateral, the general view being that multilateral Variations cooperation is necessary for economic The assumption that multilateral sanctions sanctions to be effective. However, notable operate identically in every jurisdiction is unilaterally-imposed sanctions regimes exist, a common cause of inadvertent breach. such as the US’s against Cuba. A common Although most multilateral provisions have a starting point for multilateral sanctions is common starting point (e.g. a UN resolution), Chapter VII of the UN Charter, which permits implementation is at a national level and in C Page 17 in c
INSIGHT: UN SANCTIONS VIOLATIONS variations from the core provisions are operation in many locations. prohibited dealings with Iranian and Sudanese not unusual. Aspects of sanctions regimes can be extra- customers; and with Credit Suisse Group, For example, in June 2010 the UN Security territorial – for example, the US Patriot Act which paid a $536m “global” settlement (by Council imposed additional sanctions on of 2001 asserts the right of US authorities far the largest sanctions settlement to date). financial and shipping enterprises relating to to “seize funds in non-US banks” so that “[nuclear] proliferation-sensitive activities” if tainted funds under the US regime are The regulators in Iran. The US implemented these via the deposited into an account at a foreign bank, HM Treasury (HMT) is responsible for the Comprehensive Iran Sanctions Accountability and that bank has an interbank account in implementation and administration of and Divestment Act and the Iranian Financial the US with a covered financial institution, international sanctions in the UK and is Sanctions Regulations, the combined effect the funds are deemed to have been deposited the primary supervisor. HMT maintains of which goes far beyond the UN position, into the interbank account in the US. This the consolidated list of organisations or including banning any US government allows US law enforcement authorities to seize individuals targeted by the UN, EU and UK, procurement contract being let to a foreign funds in the US account as a substitute for the which is regularly updated. Firms must also (non-US) company that “exports to Iran foreign account. inform HMT’s Asset Freezing Unit as soon technology used to restrict the free flow In the UK, each sanctioned regime is the as practicable where they have identified an of information or to disrupt, monitor, or subject of a separate statutory instrument, actual match with a person or entity on the otherwise restrict freedom of speech”. This based on a relevant EU regulation. Although HMT list, or where they know or suspect a widely drafted provision is capable of affecting the UK instruments are broadly similar in customer or a person with whom the firm has many legitimate products, particularly where format between different regimes, each had business dealings has committed a breach. creative or unexpected use is made of existing instrument should be studied carefully as The FSA also monitors compliance by software or hardware offerings. In the EU, subtle differences can affect what is and is financial organisations given its statutory the European Council also produced a new not permitted. Moreover, EU, US and UK objective to reduce the extent to which an regulation on 26 July 2010 which implements financial sanctions are absolute – they do not authorised firm can be used for a purpose the UN sanctions but features EU-specific distinguish between funds which have been connected with financial crime. The FSA accompanying measures, such as an export generated by the behaviour at which the Handbook requires the implementation of block on “dual-use” items; those that have no sanctions are aimed or “legitimate” funds proportionate systems and controls to reduce explicit nuclear or missile-related purpose, but which may be properly due to the payee and the risk of a sanctions breach occurring – could be used in such processes. entirely unconnected to such behaviour. although there is no specific requirement Such variations present a sizable to report a breach of the financial sanctions compliance challenge. International financial Penalties regime, Principle 11 requires firms to keep the institutions cannot simply focus on the regime Breaching a sanctions regime in the UK is FSA advised of any relevant issues of which it in any one jurisdiction and compliance treated as a criminal offence with potentially would normally expect notice. officers must be familiar with the basic severe penalties – the maximum term of imprisonment for individuals is currently seven A wider range years. Directors, managers or senior personnel However, the potential impact of the UK can also be personally liable if a corporate regime is wider than this simple, direct EU, US and UK body is guilty of a breach which can be shown prohibition. A form of words commonly used to have been committed with their consent, in the relevant statutory instruments creates financial sanctions connivance or neglect. an additional risk, which is far harder to do not distinguish In 2009, corporate Mabey and Johnson manage. Often, they provide that no funds or pleaded guilty to breaching sanctions in Iraq economic resources shall be made available between funds which and was fined over £3.5m. More recently “directly or indirectly, to or for the benefit of” have been generated members of the Royal Bank of Scotland Group any sanctioned persons. A decision by the were fined £5.6m for failing to have systems English Court of Appeal in 2007 confirms that by the behaviour at and controls to prevent breaches of UK relevant legal instruments must be construed which the sanctions financial sanctions. The US Treasury’s Office of broadly, and that prohibitions are intended to Foreign Assets Control (OFAC) has also been be draconian in nature. are aimed or active, including settlements with Lloyds TSB The prohibition of “indirect benefit” in ‘legitimate’ funds which it fined $350m for failure to record particular, introduces the possibility that a Page 18 in C in c
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