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The trade sanctions risk challenge in your organization

Alessandro Sanos, CAIA, SCR
Alessandro Sanos, CAIA, SCR
Global Director Sales Strategy & Execution, Commodities, Refinitiv

Keeping track of ever-changing economic and trade sanctions is a huge risk challenge for organizations of all sizes. How is it possible to stay on the right side of regulators?

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The relaxing of sanctions against Iran in 2016 highlights the complexity and compliance traps that exist for the unwary when conducting business across borders.

While the UN, EU and U.S. (as part of the Joint Comprehensive Plan of Action (JCPOA)) eased sanctions in some areas of trade with Iran others are still in place , and organizations run the risk of significant penalties for transgressing these.

From the United Nations to the European Union (EU) and the United States, there are a wide a variety of economic and trade sanction regimes, some of which have a global reach.

Opaque ownership structures add to the challenges of compliance, particularly for smaller organizations who may not be familiar with the 50 Percent Rule, for example, when determining whether an entity is blocked.

In this complex landscape, what do organizations need to know about economic and trade sanctions, and how can they identify where the real compliance risks lie?

Trade sanctions and other risk challenges

Ever since 432 BC, when Athens imposed a trade embargo on Megara to break the city state, sanctions have been used as an alternative to military force. They are frequently a tool to accomplish domestic and foreign policy goals or to respond to geopolitical challenges.

Economic sanctions impose barriers on the use of funds and economic resources. For instance, financial institutions can be restricted from making funds or other economic benefits — either directly or indirectly — available to specified individuals or entities.

Trade sanctions are designed to restrict or abolish trade with certain countries by prohibiting certain goods and services from specified countries from being offered for trade. Affected goods may include commodities, weapons, or dual-use goods that can be used for both civil and military applications.

Sectoral sanctions are a new breed of trade sanctions that target specific sectors of the economy. They have been imposed by both the EU and the United States with the aim of limiting Russia from gaining access to capital and debt markets, as well as technology and expertise.

How do sanction regimes work?

The range of sanctions-setting bodies includes the United Nations Security Council, the EU, and the Office of Foreign Asset Control of the U.S. Department of Treasury (OFAC).

The UN Security Council may impose economic and trade sanctions to support:

  • Peaceful transitions
  • Deter non-constitutional changes
  • Constrain terrorism
  • Protect human rights
  • Promote non-proliferation

The EU applies restrictive measures to respond to political challenges and developments that go against its objectives and values, and to bring about a change in the policy or conduct of those targeted.

All individuals and entities doing business in the EU must comply with EU sanctions, including non-EU nationals and entities incorporated or constituted under the law of an EU member state when doing business outside the EU.

OFAC administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals. All U.S. individuals and entities, wherever they are located, must comply with the U.S. sanctions regime.

The United States has interpreted its jurisdictional authority more widely than other countries and applies an extra-territorial reach, making non-U.S. individuals and entities subject to its sanctions regime.

For this reason, non-U.S. firms operating outside the United States may need to screen against OFAC sanctions.

Ownership challenge

The revised 50 Percent Rule states that any entity that is directly or indirectly owned by 50 percent or more in the aggregate by one or more sanctioned persons is considered sanctioned regardless of whether it appears on the OFAC list.

Identifying these relationships is particularly challenging as sanctioned entities and individuals may hide their identities behind multiple-layered ownership structures that try to obfuscate the ultimate beneficial owner.

Consequences of non-compliance

Complying with sanctions can be extremely complicated, and in an increasingly interconnected world this exposes organizations to greater risk.

In recent years, there has been a significant rise in the number and severity of penalties. Fines imposed on non-banking institutions by OFAC have varied between 0.72 percent of the US$9 billion in total issued in 2014, to 88.5 percent in 2016 of the total value of fines.

A more detailed view on a year on year basis can be viewed on the infographic below.

Additional potential consequences of sanction breaches include:

  • Reputational damage
  • Strained commercial relationships with clients and suppliers
  • The inability to trade with the United States or transact in U.S. dollars
  • Being designated as a Specially Designated National
  • Criminal penalties and prison sentences

It should be noted that more companies in total have been the subject of settlements for breaching OFAC sanctions than financial institutions.

How to minimize risk

A robust compliance program is the strongest safeguard against sanctions violations.

Sanctions-setting bodies usually publish target lists so organizations can identify risks and fulfill their legal obligation to report transactions suspected of money laundering or terrorist financing.

However, the level of awareness in terms of sanctions compliance varies between financial institutions, large multinationals and smaller corporates.

While the first two usually have robust sanction compliance programs in place, the level of awareness can be significantly lower with smaller corporates.

As a consequence, they could be exposed to censure and reputational damage if they are associated with a sanctioned entity or individual, even unintentionally.

In particular, their supply chains, business associates, joint ventures, and acquisition targets can present unknown risks.

For smaller organizations, this puts an added burden on often over-stretched resources. Partnering with a trusted provider of risk solutions help to ease this burden, allowing the organization to focus on business priorities.

Keeping on top of sanction updates

Technology plays a significant role in minimizing risk, as sanction lists can vary between issuing bodies and countries in terms of content and format. There can also be variations in spelling and inaccurate transliterations of foreign names.

The frequency of monthly updates from sanctioning bodies often numbers in the hundreds, with multiple additions and changes making it an onerous task keeping on top of sanctions.

The need for corporates to ensure they have the most up-to-date and correct information is essential.

Our global sanctions team operates across time-zones, with more than 450 analysts working in more than 65 languages in order to connect the networks associated to these sanctioned entities, as well as to provide up-to-date sanctions information in a timely fashion.

We provide the intelligence, technology and human expertise needed to help organizations mitigate the risk of doing business with sanctioned and associated entities in their customer and third party risk compliance programs.

Find out how World-Check Risk Intelligence data supports our clients’ due diligence obligations in the fight against crime

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