Ask the experts: Financial sanctions

Financial institutions have been forced in recent years to ‘de-risk’ when it comes to countries which are sanctioned or high-risk in other ways. Even if sanctions have been removed or restricted – as in the case of Iran – many are still unwilling to test the law. Senior adviser to the CISI, George Littlejohn MCSI, talks through the chief issues

Who runs sanctions in the UK and who must comply?Since 2016, all financial sanctions have been the responsibility of the Office of Financial Sanctions Implementation (OFSI), part of HM Treasury. The scope is wide-ranging, and in short covers most CISI members and students, and virtually all of those working in the UK. 

How do I manage my sanctions risk? The OFSI takes the view that financial sanctions are generally widely publicised. If you undertake an act that is prohibited by sanctions and, at the time you did so, you knew or had reasonable cause to suspect that the act was prohibited, then you will have breached those sanctions and may face criminal prosecution or a monetary penalty. While anti-money laundering and anti-corruption systems and controls can be integrated with sanctions compliance systems, there are important differences in terms of the lists to be considered and the specific prohibitions that need to be expressly considered. What are the main types of financial sanctions?Sanctions take three main forms:

Targeted asset freezes, which are usually applied to named individuals, entities and bodies, restricting access to funds and economic resources.

Restrictions on a wide variety of financial markets and services – these can apply to named individuals, entities and bodies, to specified groups or to entire sectors. To date these have taken the form of investment bans; restrictions on access to capital markets; directions to cease banking relationships and activities; requirements to notify or seek authorisation prior to certain payments being made or received; and restrictions on provision of financial, insurance, brokering, advisory services or other financial assistance. 

Directions to cease all business of a specified type with a specific person, group, sector or country. 
Who are the chief targets in terms of financial markets and services? These vary over time, but at present there are three main UK targets: 

Russia:Currently, capital measures apply in relation to Russia’s activities regarding Ukraine. These measures are designed to restrict access to the European capital markets in order to limit the ability of specific companies to raise capital within the EU. There are specific provisions covering companies on the capital market measures list involving dealing with certain transferable securities and money market instruments. These prohibitions are not an asset freeze, and funds and economic resources can otherwise be provided to the companies on the list, unless they are separately listed as a designated person on the consolidated list (see below), or are owned or controlled by a designated person. 

Syria: There are a number of financial restrictions in place in relation to trades in certain Syrian public or guaranteed bonds and the establishment of new banking relationships. 

Terrorism: The Terrorist Asset-Freezing etc. Act 2010 prohibits the provision of financial services, directly or indirectly or for the significant benefit of a designated person. 
Are there any exemptions? Yes there are in a number of cases, though all requiring specific written exemptions or licences.  Some sanctions though, notably the main Russian set, are absolute prohibitions, with no exemptions or licensing grounds.
Who is on the list? Financial sanctions, depending on the type of sanction, are targeted at individuals, entities, sectors or countries. Where there are sector specific or country wide financial sanctions or directions in place, these will be highlighted on the OFSI’s website. Currently it maintains two lists of financial sanctions targets, one of which is a consolidated list of all designated persons and another list of entities subject to specific capital market restrictions. 

When searching the consolidated list, you may find that you match the name or part of the name of the person or entity you are dealing with to a name on the list. This is known as a name match, and it may not necessarily mean that the person or entity you are dealing with is subject to sanctions. The consolidated list generally contains additional identifying information, such as date of birth, passport details, nationality, last known address, and employment or government role. You should consider all of the information that you hold on the person or entity you are dealing with against the information on the consolidated list to determine if you have a real match, usually known as a target match. Common sense rules apply.
About the expert

GLittlejohn_150George Littlejohn MCSI, senior adviser, CISI, has made a special study of sanctions, particularly in light of the Institute’s work with Russian institutions, including the Bank of Russia. This work – particularly the conversion of the CISI’s main exam, the International Introduction to Securities & Investment, into a dual-language programme – has received significant financial and other backing from the UK Foreign & Commonwealth Office in 2016–2017 as part of the cross-government Prosperity Fund programme.

For instance, say you have a name match for a person who is listed as a Syrian general commanding troops there, but the person you are dealing with is aged 15 and was born in the UK. This is probably a name match rather than a target match. On the other hand, if you find a close name match for a person subject to a terrorist asset freeze and they have a similar date of birth but a different address, you may have identified a new alias being used to circumvent financial sanctions. Contacting the OFSI may assist you to clarify whether you have a target match. The consolidated list does not currently have a fuzzy-matching search facility, but standard direct search tools are available for the Excel, PDF and HTML formats of the lists.
Does the FCA provide guidance?  The FCA has published its financial crime guide for firms to illustrate examples of good practice for designing systems to mitigate sanctions risks.
What are the penalties for getting it wrong? Severe. Under new (2017) law, in a case where a breach or failure relates to particular funds or economic resources and it is possible to estimate the value of the funds or economic resources, the maximum is the greater of £1m and 50% of the estimated value of the funds or resources. In any other case, the maximum is £1m. The 2017 Act also increases the maximum sentence for criminal prosecutions from two to seven years’ imprisonment and brings financial sanctions into the scope of Deferred Prosecution Agreements and Serious Crime Prevention Orders. 
What are the differences between US, UK and EU sanctions? Many, although the broad principles in each case are very similar. Iran is an intriguing – and still worrying – anomaly for many. As part of the sanctions relief given to Iran in return for its reigning in its nuclear programme, the US has also offered waivers to non-US companies for sanctions for doing business in Iran. President Trump is due to extend these waivers this month. However, any non-US businesses which nonetheless have significant US business interests need to take special care when taking advantage of these waivers, and most such businesses err on the side of great caution.

Russian-related transactions still cause great concern for institutions on both sides of the Atlantic, not least because they bring an interplay with other laws. Many key Russian businesses and assets are still under state control and the use of intermediaries is commonplace. This means that the risk of falling foul of corruption laws under, for instance, the UK Bribery Act and the US Foreign and Corrupt Practices Act in Russia remains high. 

Published: 31 May 2017
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