April 23, 2021
By: Benoit Beaulieu, ACSS Reporter
The ACSS held its inaugural European conference on global economic sanctions and export controls last month, discussing Brexit, the E.U., the maritime sector and sanctions screening. Between March 9th and 10th, ACSS members and registrants had the opportunity to learn from an all-star lineup of sanctions professionals while horizon-scanning future developments. They also examined the practical implications and considerations for global sanctions.
We have listed the highlights below, detailing actionable information for your respective practice.
Post Brexit: the U.K. and E.U. Sanctions Framework
How U.K. Sanctions Implementation Has Been Streamlined
Brexit, and the resulting Sanctions and Anti-Money Laundering Act (SAMLA), has effectively removed the E.U. as the middleman that the U.K. had traditionally worked through to implement sanctions regimes. Prior to Brexit, E.U. decision making concerning sanctions directly influenced U.K. legislation. This included E.U. adoption and additions made to UN Security Council Resolutions, and E.U. specific regimes. Prior to Brexit, the U.K. could only attach offences and issue licensing based on what had been decided by the E.U.
Thanks to SAMLA, this process has now been streamlined. The U.K. can adopt UN Security Council Resolutions directly and implement its own regimes according to its own interests.
The Difference Between U.K. And E.U. Frameworks
The new U.K. sanctions framework differs slightly from that of the E.U., despite remaining closely aligned in their respective goals and resulting in similar consequences. The most important consideration relates to designations, licensing, and exceptions.
Under the U.K. framework, UN designations are automatically adopted. Most E.U. designations have been adopted by the U.K., although there has been a noticeable 10% drop. This is because the U.K. applies a test by which the Secretary of State must have a reasonable ground to suspect that a person or entity has been involved in a specified activity. Further, he or she must consider whether the designation is appropriate given the purpose of the pertaining sanction. The latter analysis must consider the effects of the designation on the person or entity.
Exceptions and Licensing
Exceptions for the U.K. sanctions regime are stipulated within the corresponding legislation and are applied automatically in certain circumstances. That being said, individuals and entities must assess and make certain that their activity falls within the exception.
In contrast to exceptions, licenses permit an activity that is otherwise prohibited according to the sanctions legislation. It is up to the corresponding licensing authority to assess the application and grant a license. The Office of Financial Sanctions Implementation (OFSI) details the grounds for licenses in their legislation, while the grounds for trade related licenses are detailed in the statutory guidance.
The Continuity of E.U. Sanctions Implementation
Since Brexit, E.U. sanctions have continued to pursue their traditional objectives, albeit, taking a different approach in reaching them. Specifically, in addition to using geographical sanctions, the E.U. has begun using horizontal sanctions—regimes that are thematic and focus on a certain activity, regardless of where it is taking place. While more complex and larger in scope, these regimes implement simpler measures, such as asset freezes and travel bans. The best example of this new approach is the recent E.U. Global Human Rights Regime.
Coupled alongside the use and implementation of horizontal sanctions is the E.U.’s renewed focus on the uniform application of its regimes through increased enforcement and monitoring. The means by which were detailed in a communication issued earlier this year.
An Innovative New Strategy – The Resilience Communication
On January 19th, the European Commission issued The European economic and financial system: fostering openness, strength and resilience. The communication, often referred to as the “Resilience Document,” considers a range of topics, namely the strengthening of the Euro and improving the resilience of E.U. financial market infrastructures. Evidently, the communication recognizes that E.U. sanctions play a formidable role in the eventual implementation of this strategy.
The Resilience Document considers the full lifecycle of E.U. sanctions from drafting and application, to supervision, cooperation, and external projection. Detailed in a number of key actions, the communication emphasizes the need to continue improving uniform implementation, enforcement, and monitoring of E.U. sanction regimes. They are summarized below:
Key action 10: In 2021, the Commission will develop a database, the Sanctions Information Exchange Repository, for the prompt reporting and exchange of information between Member States and the Commission on the implementation and enforcement of sanctions.
Key action 11: In 2021, the Commission will work with Member States to establish a single contact point for enforcement and implementation issues which have cross-border dimensions.
Key action 13: The Commission will set up a dedicated system to allow for anonymous reporting of sanctions’ evasion, including whistleblowing. The system will provide the necessary confidentiality guarantees.
It also pledges to improve and modernize existing tools to assist and defend E.U. operators against secondary sanctions and unjust, unilateral sanctions by third countries. This includes improving and building upon the blocking statute by implementing the following:
(I) clearer procedures and rules for applying Article 6 (in particular, to facilitate the recovery of defendants’ assets across the EU);
(II) strengthened national measures to block the recognition and enforcement of foreign decisions and judgments based on the listed extra-territorial measures (Article 4);
(III) streamlined processing for authorization requests pursuant to Article 5, second paragraph, including a review of the information requested;
(IV) possible involvement in foreign proceedings to support EU companies and individuals.
Lastly, despite these increased enforcement and monitoring measures, the Resilience Document pledges in key action 12 to continue facilitating foreign direct investment and humanitarian aid to third countries. With developments scheduled to roll out throughout this year, these next few months should be telling in terms of how the E.U. adapts their sanctions strategy.
Financial Sanctions Enforcement – The Work of OFSI after E.U. Exit
In addition to the changes made in how the U.K. has revised its sanction implementation since the end of the Brexit transition period, the way in which U.K. sanctions are enforced has changed as well. Most notably, OFSI now has a more authoritative role, which has implications worth considering.
How Has OFSI Progressed Since Brexit?
Since OFSI’s creation in 2016, the regulatory body has been busy at work in building the U.K.’s sanctions infrastructure, having made significant progress thus far. Notably, thirty-four statutory instruments have been implemented to effectively transfer both UN and former E.U. regimes into U.K. law. These instruments have ensured that U.K. regimes maintain the same policy effect as the regimes that they replaced. In addition to these instruments, OFSI has already ratified its first autonomous regime as well—the U.K. Global Human Rights Sanctions Regime. Plans are already underway to unveil an additional autonomous regime, targeting corruption, this year. It’s worth noting that the U.K. ability to implement sanctions autonomously means that OFSI can issue listings independently as well, greatly improving the speed by which the body can enforce U.K. sanctions.
The U.K.’s Approach to Financial Sanctions Enforcement
The U.K.’s approach to sanction enforcement begins with issuing guidance, regime specific guidance in particular. The reason for this starting point is two-fold. Firstly, the more educated U.K. operators are on sanctions regimes and how to comply with them, the greater the likelihood of uniform compliance. Secondly, under current legislation allowing OFSI to impose penalties, it must be proven that breachers knowingly violated sanctions policy. Thus, issuing significant guidance mitigates the argument that violations were made unknowingly.
Operating autonomously also means that OFSI can issue licenses for specific, extraordinary transactions, as well as general licenses to allow for certain transactions that would otherwise be prohibited. The capacity to issue general licenses when needed is expected to significantly reduce the lag time that U.K. operators have traditionally experienced when looking to clear their transactions.
Lastly, despite leaving the E.U., the U.K. has signaled that they will continue to work with international partners, such as E.U. states and members of the G7 to maintain uniform implementation and remain appraised of emerging issues.
Assessing U.K. Jurisdiction
In terms of ownership and control specifically, the U.K. has effectively transferred the definition that’s been used for E.U. regimes. For convenience, this is defined below:
An entity is owned or controlled directly or indirectly by another person in any of the following circumstances:
- The person holds (directly or indirectly) more than 50% of the shares or voting rights in an entity
- The person has the right (directly or indirectly) to appoint or remove a majority of the board of directors of the entity
- It is reasonable to expect that the person would be able to ensure the affairs of the entity are conducted in accordance with the person’s wishes
Dealing with Export Controls Versus Sanctions: Licenses, Lists and Other Practical Considerations
While at face value export controls and sanctions seem to be quite similar, there are important distinctions between both types of regimes that must be considered when dealing with strategic goods—specifically military and dual use goods.
Export Controls and How They Differ from Sanctions
Export controls are regulations that are often based on bilateral and multilateral agreements. These regimes are implemented to ensure national and international security by promoting the non-proliferation of strategic goods. In contrast to sanctions, export controls are concerned with goods and not with countries. Consequently, the specific destination of goods is generally irrelevant for export controls.
While export controls do not present prohibitions, like sanctions they do have license requirements. Despite the potential overlap between sanctions and export controls, they are ultimately governed by different authorities and are unique in their respective approach. Typically, export controls for countries will be very similar, since controls are based on worldwide agreements. However, licensing requirements between countries will likely differ.
Like sanctions, export controls can have extraterritorial effects that must be assessed before conducting a transaction. This includes a detailed comparison of the descriptions of the goods that you are trading with the relevant legislation of the control. The penalties for violating export controls can be as severe as when violating sanctions regimes.
How to Manage Export Control Compliance
Assessing compliance for export controls should not be mutually exclusive from assessing sanctions compliance. From an operational perspective, it’s in your best interest to screen a transaction for both types of regimes.
International transactions will inherently involve multiple jurisdictions and regulations that present multiple layers of risk that must be accounted for—from counterparties, intermediaries, to financial institutions and more. Consequently, it’s important to screen for both subject of transaction and the description of the goods. By screening these elements of a trade for sanctions risk at the outset of the transaction, you will gain a holistic overview of the trade, rather than solely looking at whether the goods require a license. In following this process, you can potentially eliminate the prospect of a trade, and you can save time applying for an export control license. That is, if you identify sanctions risk and avoid the trade altogether.
In contrast to financial transactions, trades can have long durations where material information can change, whether it be a change in regulation, or a change in one of the multiple stakeholders in the trade value chain. The longer the transaction period, and the more stakeholders involved in the trade, the greater the risk of a change in the circumstances of a stakeholder, a change in regulation, or of human error. Additionally, the type of goods being traded and the means of transport present additional layers of complexity and risk. For example, additional data elements to consider might include ports, vessels, ownership structures, importers, exporters, banks, and intermediaries. These variables make it imperative for there to a consistent flow of communication and assessment for every element of a trade throughout its lifecycle.
Lastly, managing export licenses is a challenge in itself. In part due to the difficulty of identifying whether goods are considered to be dual-use or military grade.
Identifying Dual-Use Goods
With the description of goods being non-standardized, effectively identifying dual-use goods with relevant export control legislation is extremely difficult. The description of goods is an unformatted, non-categorized, free-form piece of text. In addition to the formatting being non-standardized, the terms used in the description are non-standardized as well. The same good in two separate trades might be described differently. For example, operators might be presented with a description of goods that uses synonyms, acronyms, varying keywords, and alternative descriptions for a good that they’ve previously seen described otherwise. Consequently, interpreting export control descriptions, which use generic terms, is extremely difficult.
When applying for a trade, operators should turn to their legal counsel for assistance in interpreting the export control. In addition, operators should make use of standardized identifiers, such as ECCN codes, to see if their good is permitted by the export control.
Maritime Risk – Practical Tips to Make Your Controls More Effective
Compliance on the high seas has been a point of focus for risk managers over the past few years. This is largely in part due to the U.S. Office of Foreign Assets Control (OFAC) having taken a pronounced focus on enforcing sanctions against players in the maritime shipping industry. For context, OFAC has published four advisories since 2018 which included designations against ships and their owners pursuant to ongoing U.S. sanction regimes against Syria, Iran, and North Korea. The advisories also included guidance concerning deceptive maritime shipping practices, including:
- Disabling or manipulating Automatic Identification System (AIS)
- Physically altering vessel identification
- Falsifying Cargo and Vessel Documents
- Ship-to-Ship (STS) transfers
- False flags and flag hopping
- Complex ownership and management structures
As a result of OFAC’s heightened focus on the maritime shipping, the industry has experienced a number of challenges. In particular, applying the guidance prescribed by OFAC and working with risk-averse financial institutions.
Implementing Compliance Measures
With 90% of global trade facilitated via maritime shipping, there is an immense volume of transactions involving multiple parties and jurisdictions that require screening.
To add an additional layer of complexity, operators within the industry must account for not only their clients, but assets (vessels, cargo) and suppliers (shipping terminals, banks, insurance companies, and so on). Evidently, ensuring compliance measures are being properly implemented is extremely difficult, especially when guidance provided is typically suited for financial institutions.
For example, wind-down times for general licenses are more easily applied in the financial sector since they primarily address wire transfers which can be intervened quickly. In contrast, transaction times in the shipping industry are far longer and can be more complicated since physical assets need to be accounted for. In addition, sanctions evading tactics, such as targeted AIS manipulation, has made it increasingly difficult to ensure that compliance measures are being followed.
A Traditional Industry Operating in Unconventional Circumstances
Maritime shipping is a traditional industry that continues to use conventional methods of business. It is an industry that is heavily reliant on trust between customers and owners, requiring each to conduct their own due diligence and Know Your Customer (KYC) assessment.
In light of the increased focus on the industry by OFAC and other sanctions authorities, there is a need for more robust screening and risk assessment measures that put a strain on the relationships between stakeholders. Like many other traditional industries, maritime shipping is heavily reliant on trust between customers and owners. The increased need for more robust screening and risk assessment measures can put a strain on these relationships. Consider, for instance, the increasingly volatile global political climate in conjunction with the ongoing pandemic.
Working with Stakeholders
Lastly, the shipping industry is reliant on the financial services industry to facilitate transactions. With financial institutions being notoriously risk averse, the slightest hint of a vessel or organization being put under scrutiny will likely result in that entity being blackballed—even if it is not formally designated. A prime example of this are vessels that OFAC has mentioned in the industry advisories but have not formally designated. Consequently, depending on what is included in guidance, OFAC’s measures have the potential to put a strain on the supply of vessels capable of conducting business.
Practical Tips for Implementing Controls
Evidently, the challenges mentioned above question what controls are needed in the maritime sanctions space while being the least prohibitive in terms of business interruption. What are reasonable controls? How can regulatory expectations be met?
The first step is to improve current controls by increasing screening for compliance risk, evaluating performance, and regarding them through a customer lifecycle perspective. The goal should be for controls to be as automated, systematic, and predictable while maintaining a degree of scrutiny. This will make controls cheaper to implement and more easily manageable. Ultimately, there is an incentive for all stakeholders in the industry to avoid a scenario where financial institutions are forced to de-risk and exacerbate the challenges described above.