Sanctions are a massively complex area. But all too often, financial institutions think sanctions adherence is fairly straightforward – it’s just checking a list to ensure an individual or company doesn’t appear on it, right?
Wrong. Sanctions are far more multi-dimensional and nuanced than that. The UK implements a range of sanctions regimes through regulations made under the Sanctions and Anti-Money Laundering Act of 2018, The Export Control Order 2008, Counter Terrorist Act
2008 and Anti-Terrorism, Crime and Security Act 2001. And this sanctions landscape has changed further since the start of the Ukrainian war – as the West developed a range of sanctions aimed at punishing Russia without resorting to military action, the sanctions
environment has become much more challenging.
Understanding the different types of sanctions
The upshot is that financial institutions really need to be on the front foot in understanding sanctions and how they respond to them. There are lots of different dimensions at play when it comes to sanctions adherence and firms often become unstuck because
of the data gaps, or inefficiencies in processes, technology and staff knowledge. But the first step is understanding the different types of sanctions and how they are applicable:
Economic sanctions: these can be trade sanctions or financial sanctions. Trade sanctions, typically involve a ban on trade that are often limited to certain sectors (arms) or excludes others (e.g. food and medicine) and are imposed for a variety of
political, military or social reasons. Financial sanctions involved restrictions on the flow of funds (such as loans and access to financial markets) and can come in the form of asset freezing. In terms of how the Ukrainian situation has impacted economic
sanctions pertaining to financial institutions, sanctions were tightened to prohibit financial transactions with a number of state-owned and associated organisations. These include the Central Bank of the Russian Federation (CBR), the Russian National Wealth
Fund, the Ministry of Finance of the Russian Federation, and a number of banks and energy companies such as SberBank and Gazprom Neft. So financial institutions need to have measures in place to ensure they have no financial dealings with such entities in
breach of Russian sanctions.
Sanctions on individuals: sanctions can apply to individuals such as political leaders or business people with close ties to government officials. Sanctions of this nature tend to relate to asset freezes and can include travel bans. Asset freezing
most often comes in the form of frozen bank accounts, but in the Russian fall out, we have seen assets such as houses and yachts owned by Russian oligarchs frozen. Financial institutions need to identify customers and beneficial owners (UBOs) who fall subject
to sanctions and put measures in place to prevent them accessing these assets or benefitting financially from them. Beneficial ownership is a crucial element of anti-money laundering and identifying and applying the correct risk-based approach to UBOs is a
key regulatory requirement.
Shipping sanctions: financial sanctions continue to create problems for ship owners, operators, financiers and insurers. The complexity of UN, US, EU and UK sanctions impacts voyage routes and deliveries. Shipping sanctions restrict the companies
and organisations can do business with, either directly or through supply chains. Direct sanctions can be placed against ships or shipping firms with links to people trafficking or drug smuggling – so firms need to run checks on vessels and shipping companies
they have dealings with to ensure they are not on a prohibited list, and/or subject to sanctions-related restrictions.
Environmental sanctions: these are a relatively new concept, are largely self-imposed by an organisation and restrict who firms do business with. For example, a corporate client in breach of environmental laws (e.g. an oil company with a poor pollution
record) or a client of theirs with links to illegal wildlife trafficking in its supply chain. Financial institutions need to understand the business of clients and their supply chains and be able to identify if they are contravening environmental laws, or
risking reputational damage by being associated with facilitating environmental harm.
The complexity of sanctions means financial institutions need a thorough understanding of the sanctions that apply to them, and their customers. Being able to understand these sanctions and how they map against your business activities is the first step
in being aware of the risks, the gaps and how you might be at risk of contravening sanctions regulations. Forewarned is forearmed and an assessment of your exposure is vital.