In February, Russia invaded Ukraine, bringing down on Moscow a regime of sanctions coming mainly from Western countries. What does it mean when sanctions are imposed on an individual, class of people, entity or country?
The Association of Certified Anti-Money Laundering Specialists (ACAMS) defines sanctions as “punitive or restrictive actions taken by countries, regimes, or coalitions with the primary purpose of bringing about a change in behavior or policy. Sanctions can restrict trade, financial transactions, diplomatic relations and travel. They can be specific or general in their implementation and application. Sanctions are also called restrictive measures.
Sanctions can be imposed by one country (unilateral) or by several countries (multilateral) on an individual, class of people, entity or country to influence their actions.
For example, under the Charter of the United Nations, the Security Council can take measures to maintain or restore international peace and security under Chapter VII of the Charter. The Security Council is made up of 15 members. The five permanent members are China, France, the Russian Federation, the United Kingdom and the United States. The 10 non-permanent members are elected for a two-year term by the General Assembly. The approved sanctions are binding on all Member States.
The European Union (EU) applies all sanctions adopted by the United Nations Security Council. In addition, the EU may also decide to impose sanctions on its own initiative (“EU autonomous sanctions”). EU sanctions apply within EU jurisdiction, to EU nationals wherever located, and to companies and organizations incorporated under the law of a Member State. Application should be undertaken by Member States.
In addition, the United States Treasury Department’s Office of Foreign Assets Control (OFAC) administers and enforces economic and trade sanctions based on United States foreign policy and national security objectives against countries and regimes. targeted aliens, terrorists, international narcotics traffickers, those who engage in activities related to the proliferation of weapons of mass destruction, and other threats to national security, foreign policy, or the economy of the United States. OFAC publishes lists of individuals and companies owned or controlled by, or acting for or on behalf of the targeted countries. It also lists individuals, groups and entities, such as terrorists and drug traffickers designated under programs that are not country-specific.
The United Kingdom’s Export Control Organization (ECO) authorizes controlled goods and country-specific embargoed goods, while Her Majesty’s Treasury authorizes funds or assets.
Taking the example of the war in Ukraine, the United States and the United Kingdom have both imposed additional sanctions on Russia, including: a ban on new inward investment, as well as severe sanctions against two Russian financial institutions (Alfa Bank and Sberbank), against major state-owned companies, and on the government offhere and their family members.
As part of the UK effIn order to isolate Vladimir Putin, he announced sanctions against seven oligarchs. Roman Abramovich, the owner of Chelsea Football Club, has had his assets frozen and banned from carrying out transactions with British individuals and companies, as well as from travelling. Abramovich’s former business partner, industrialist Oleg Deripaska, was also similarly punished.
Another notable example is the longstanding sanctions regime imposed on North Korea over the country’s continued pursuit of its nuclear and missile program. Executive Order 13722 blocks the government of North Korea and the Workers’ Party of Korea; prohibits the export and re-export of goods, services (including financial services), and technology from the United States or by a US person to North Korea; and prohibits any new investment in North Korea by an American person.
Sanctions can further be categorized into four types: diplomatic, financial, trade and travel. A diplomatic sanction restricts or suspends membership in international organizations and diplomatic visits that affect the ability of the target to interact with other countries. It can also limit access to financial aid or loans. Financial sanctions may involve the seizure or freezing of accounts. Trade sanctions, sometimes called embargoes, limit the import/export of specific goods (eg arms, oil or diamonds) or services (eg technology, training, financing). Travel sanctions restrict the mobility of listed individuals (preventing them from traveling to and through certain countries). It can extend to any asset, including bank accounts to pay for travel.
As payment transactions are primarily the only record that can detect a potential sanctions violation, the role of a financial institution is crucial in discerning the circumstances that warrant sanctions. Financial institutions also have the right to seize or freeze assets to prevent payments to certain people.
Thus, a financial institution must have a strong anti-money laundering (AML) compliance program which should be based on the following pillars to fight against financial crime: internal policies, procedures and controls; appointment of an AML officer; employee training; independent testing; and Customer Due Diligence (CDD). Under CDD, financial institutions must identify and verify the identity of the customer as well as the parties that own or control them, their transactions and the applicable sanctions. The name of the client and parties should be checked against the sanctions list. These are done by collecting intelligence, verifying transactions with violations, and filing suspicious activity reports. A good AML compliance program will help financial institutions determine any customer involvement with a sanctioned target or whether the customer himself is a sanctioned person or entity. Finally, the client’s transactions should be verified to ensure that they are not dealing with sanctioned individuals or entities. When done correctly, it should help prevent Ffinancial institutions from violating the sanctions.
Any views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general informational purposes only and should not be used as a substitute for advice. specific.
Joanne Reyes is a manager in the Financial Crime practice of PricewaterhouseCoopers Consulting Services Philippines Co. Ltd., a Philippine PwC member firm.
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