The geopolitical events of recent weeks have reinforced the importance of understanding how sanctions can affect markets, businesses and individuals. International companies which fail to prepare for the prospect of sanctions are increasingly at risk.
In this three-part series, David Savage and Thulasy Packianathan identify some of the potential sanctions hotspots across the globe for the coming 12 to 18 months and provide practical guidance on how to deal effectively with this fast-evolving area.
Following our analysis of potential sanctions implications in different countries in parts one and two of the series, we now turn to consider some practical ideas to help deal with this fast-paced area.
Sanctions can have an impact on any industry and so it is pivotal to have systems in place to safeguard and mitigate any potential breaches of the various sanctions regimes. The penalties for such breaches are substantial and growing, as is the reputational damage it could have on businesses.
How can businesses best react to sanctions?
Corporates and financial institutions with exposure to sanctions developments need to fully understand their exposure and identify proactive steps to take should additional sanctions be implemented. Simply waiting until new sanctions are actually implemented is unlikely to be sufficient, particularly should breaches of those new rules occur. Understanding and addressing exposure to new sanctions enables a company to assess commercial risk versus reward and develop procedures designed to respond rapidly to regulatory change while minimising operational chaos.
We recommend the following as the best ways to prepare for change.
Compliance response playbook
- Review/create a ‘compliance response playbook’, which should include operational procedures and communications strategies to take in the event of the swift imposition of new sanctions.
- Identify the regulatory regimes to which the business is exposed. Such exposure may be due to jurisdictional location, governing law of contracts, currencies and banking systems used, locations where goods are manufactured, purchased from or sold to or via, nationalities of executives and those involved in the business in question.
- Engage promptly with sanctions authorities to understand the potential impact of sanctions on the business (directly or via local finance or trade bodies).
- Leverage staff with experience of US, EU and UK sanctions from all parts of the business, including compliance, legal, operations, audit, finance, IT and the business itself, to establish working groups designed to risk map potential scenarios.
- Identify US, EU or UK persons who may need to recuse themselves in case of new sanctions and identify alternative approvers and issue guidance to such persons on the policy and the procedure.
Know your customer (KYC)
- Review existing customers to ensure no business is currently being undertaken with newly sanctioned individuals or blocked industries.
- Ensure transactions are screened in real-time against relevant sanctions list.
- Identify accounts that belong to potentially exposed persons (PEPs) and conduct enhanced due diligence on any transactions involving these accounts.
- Identify all beneficial owners of customers and be aware of offshore holding companies, intermediary companies, trusts, or other complex or opaque ownership structures.
- Identify high-risk jurisdictional and sectoral accounts and rescreen.
- Review correspondent banking agreements with high-risk banks and subject their transactions to enhanced due diligence.
- Consider exiting any correspondent banking relationship where analysis indicates there is significant scope for sanctions breaches.
- Retune and test all transaction monitoring systems and ensure that escalation procedures are reviewed and disseminated.
- Monitor any transactions or shipments and ensure that standing agreements are supported by sanctions clauses that enable the business to terminate the agreement.
- Consider the following red flags:
- High-value transactions between known low-risk and high-risk jurisdictions
- High-value property transactions
- Multiple low-value transactions to different accounts
- Conversion to/from virtual assets
- Transactions where beneficiaries are shell companies, trusts or other special-purpose vehicles
- Applications for new loan facilities with immediate drawdowns
- Repayments in full of existing loan facilities
- Fire sales (ie sales at a significant undervalue)
Transaction and supply-chain mapping
- Identify potentially impacted suppliers of services or goods and consider looking for alternative companies or individuals or winding down those business lines.
- Identify any goods or technologies that are currently or intended to be exported to sanctioned jurisdictions.
- Identify any transactions with sanctioned entities that have ongoing or continuing obligations.
- Identify and promptly collect debts from sanctioned entities or individuals.
- Engage with banks and insurers to ensure that relevant financial facilities and coverage are not impacted.
- Identify all commercial agreements with entities or individuals with exposure to sanctioned jurisdictions to assess:
- contractual rights, including force majeure, illegality, suspended performance termination or wind-down, in case of a change to a sanctions regime
- payment terms
- contractual rights to request amendment to payment terms, including changes to currency of the contract and pre-payment or credit tenor reduction
- sanctions-related warranties and indemnities, and
- notice clauses.
- In respect of Russia (and Venezuela), identify the ISIN or CUSIP of entities currently subject to sectoral sanctions and plan relevant actions to block any securities in their custody that become blocked.
- Consider whether to apply for EU, UK and/or US licences for any activity that may otherwise be a breach of sanctions.
Why is this important?
While there has historically been a limited appetite for enforcement within EU member states, certain jurisdictions are now beginning to identify, investigate and subsequently prosecute individuals and companies for breaching the various EU sanctions regulations. In addition there remains considerable appetite across the EU to enforce anti-money laundering breaches. In addition, the UK’s sanctions regulator, the Office of Financial Sanctions Implementation is beginning to get more active, and OFAC, the US Office of Foreign Assets Control, has historically extracted record-breaking fines from corporates around the world.
Compliance, therefore, has never been more important, and the consequences for failure to comply with the various regimes have never been more serious.
Horizon scanning series:
- Afghanistan, Belarus and China.
- Russia, North Korea and India.
- How to prepare for change in sanctions compliance
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