In the past couple of months, sanction list screening has become one of the most critical compliance tasks. A single question has triggered much of the change: “Are my business partners and other third parties I deal with really sanctioned?” Here are some considerations that will help answer that question.
Jurisdiction. The first question is always, what sanctions is your company subject to?
Within the EU, for example, there are three main sources of sanctions. All member states are obliged to implement sanctions imposed by the UN Security Council under Chapter VII of the UN Charter. In addition, the EU can also implement measures based on unanimous decisions of the European Council in line with the objectives of its Common Foreign and Security Policy (CFSP) set in Article 21(2) of the Treaty of the European Union (TEU). Further member states can also create their own national lists (for example, the Dutch national terrorism list). Sanctions imposed can include, among other things, an asset freeze, export control measures, as well as restrictions on trade and investment. The EU Sanctions Map gives a clear overview on the current sanction landscape of the EU.
As a result of the EU–UK Withdrawal Agreement on 31 December 2020, the UK has also implemented its own sanctions regime via the Sanctions and Anti-Money Laundering Act 2018 (SAMLA). In addition, the U.S. OFAC rules set out list-based, country-based, sectoral or secondary sanctions, which often have extraterritorial effect where there is a U.S. nexus.
In some cases, the jurisdictions’ different sanctions regimes are divergent and can be contradictory. For example, the Trump administration decided in 2018 to withdraw from the Joint Comprehensive Plan of Action (also known as the Iran Nuclear Deal), agreed previously by the EU and U.S., thus reimposing sanctions against Iran. The decision included sanctions against activities of non-U.S. persons with no connection to the U.S., so-called secondary sanctions in U.S. terminology. As a response, the EU amended the Blocking Regulation to protect EU businesses from the extraterritorial application of U.S. sanctions targeting Iran.
Debtors, creditors, and banks in the light of sectoral sanctions. The second aspect is whether a sanctions list hit refers to a bank, creditor or debtor and what is in fact sanctioned. For example, sanctions like (EU) No 833/2014 prohibit trade in money-market instruments such as treasury bills, certificates of deposit, and commercial papers but allow instruments of payment. So, if a sanctioned bank pops up in your master data, and it is verified that only daily operative business is conducted in the form of payments from your company to non-sanctioned creditors which have a bank account at the sanctioned financial institution, this activity is not prohibited according to the EU sanctions law.
If a sanctions list hit refers to a debtor or a creditor, similar considerations have to be taken into account. These sanctions like (EU) No 833/2014 in the EU or EO. 13660, 13361, 13662 in the U.S. issued under the Obama Administration restricted access to the capital markets for certain Russian state-owned banks and companies active in certain economic sectors such as energy and defense sectors. Any business activity in these economic sectors is prohibited with a sanctioned entity. Beyond these rules, companies within the EU also face the so-called anti-circumvention clause preventing an EU company from knowingly and intentionally outsourcing certain activities to a non-EU subsidiary in order to avoid abiding by the EU sanction law.
Fifty percent aggregated or not. In order to define whether an entity is sanctioned or not, you also have to look at the ownership structure of the entity. EU, UK and U.S. sanctions regimes follow largely the same “50 percent rule,” with minor distinctions. Within the EU, sanctioned ownership refers to more than 50 percent. According to OFAC rules, sanctioned ownership has to be equal to or more than 50 percent.
However, in terms of aggregation principle, the different sanction regimes are more divergent. Take the following example:
Company A is 30 percent owned by Company B and 30 percent owned by Company C. Company C is 100 percent directly owned by an OFAC SDN and EU and UK Sanctioned Individual A. Company B is also 100 percent directly owned by an OFAC SDN and UK Sanctioned Individual B.
The EU and U.S. sanctions regimes apply basically the same approach in this case. In the U.S., OFAC’s 50 percent rule applies to entities owned 50 percent or more in the aggregate by one or more blocked persons. Within the EU, the same aggregation principle is followed.
In contrast, the UK’s OFSI General Guidance states that an entity is sanctioned if a sanctioned entity owns or controls this entity directly or indirectly by holding more than 50 percent of the shares or voting rights in an entity. In other words, UK sanction law would not aggregate different designated persons’ holdings in a company unless the shares or rights are subject to a joint arrangement between designated parties or if one party controls the rights of another.
Ownership or control. In cases of the most widely-used type of EU sanction – an asset freeze – making payments or offering goods or services to a third party linked to a sanctioned party through ownership or control is prohibited. The UK sanction regime is also applies this principle. According to OFSI General Guidance, where the financial sanction includes an asset freeze, it is generally prohibited to deal with the frozen funds or economic resources, belonging to or owned, held or controlled by a designated person. However, OFAC’s 50 percent rule speaks only to ownership and not to control. An entity that is controlled (but not owned 50 percent or more) by one or more blocked persons is not considered automatically blocked pursuant to OFAC’s rules.
Our role as compliance officers continues to evolve as sanction list screening becomes an ever more critical and complex task. But a systematic, step-by-step approach can help us meet the challenges.