Understanding international sanctions




Keeping abreast of new regulations is a challenge for compliance professionals. It has featured as a top priority every year that our Compliance Horizon survey has been running. It is especially difficult in the field of sanctions, and in 2017, close to 45 percent of compliance professionals surveyed voted international sanctions as the single biggest external risk to their business.

There are many reasons why sanctions pose such a challenge for companies, but the nature of regimes is probably the single biggest issue. Requirements are imposed by various different countries and supranational bodies, and they do not necessarily align. This creates tension for corporates operating internationally and requires businesses to make difficult decisions about the standards they apply.

To add to this, the regimes themselves are changed regularly, which means that compliance teams need to monitor the political landscape constantly if they want to manage the risks proactively.

Ones to watch

The international community has already signalled that it is contemplating some changes to its sanctions against various countries in 2018.

Iran is likely to remain a hot topic. On 15 October 2017, US president Donald Trump refused to certify Iran’s compliance with the internationally brokered nuclear deal despite the UN nuclear watchdog confirming Iran’s continued compliance. All of the other signatories to the Joint Comprehensive Plan of Action – better known as the Iran deal – have reiterated their commitment to it. Mr Trump has publicly stated that he would like to renegotiate the terms of the deal, but it is possible that the recent outbreak of anti-government demonstrations in several Iranian cities will lead his administration to revive the argument that financial sanctions can spur regime change in the country. Indeed, in early January 2018, a state department official said the administration was considering targeted economic sanctions on individuals in the Iranian government in response to the violent crackdown on protesters.

So far, however, the US government has struggled to garner support from the EU partners of the Iran deal in building a coalition against the country, let alone stepping away from the deal. Given international opposition, and with the US Congress failing to take any action over the nuclear-related sanctions since October 2017, it seems unlikely that Mr Trump will completely back away from the deal. As of early January 2018, the most likely scenario is that the administration will waive the sanctions, and along with US allies in the Gulf, pursue a wider strategy to sanction Iran’s ballistic missile programme and target its proxies in the Middle East. Looking further into 2018, we anticipate renewed efforts by the Trump administration to encourage the EU and European signatories to the nuclear deal to support this stance on Iran’s activities in the region.

Another country to watch in the short term is Myanmar. Non-governmental organisations have been calling for sanctions to be imposed on the Burmese military over its campaign against the Rohingya. Sanctions were only fully lifted by the international community in October 2016, but both the EU and the US have said publicly that they will consider their options if the situation does not improve. The US has already sanctioned Maung Maung Soe – who, in his former role, was in charge of the military operation in Rakhine state where the violence and ethnic cleansing has been taking place. Further sanctions are likely to target other military personnel. The Burmese military retains interests in key sectors of the economy, meaning that any new sanctions may have far-reaching implications for international companies doing business there.

More sanctions are likely to be applied to Venezuela too. There are signs that the existing restrictions are causing problems for the government, but there is little sign of political change and that is what is driving the measures. However, there is more that can be done and there are a lot of people who are potential targets as the US ramps up the pressure on Venezuela. The sanctions will continue to hit the oil industry hardest, but with president Nicolás Maduro trying to restructure the country’s debt and appointing vice-president Tareck El Aissami to lead the effort, who the US has also sanctioned, creditors too will have a tricky path to walk in 2018.

One country where we may well see sanctions eased longer term is Zimbabwe – that is, if president Emmerson Mnangagwa can deliver meaningful economic and political change. In November 2017, Zimbabwe underwent a period of massive political upheaval that saw president Robert Mugabe ousted by the country’s military after 37 years in office. He was replaced by the former vice president Mr Mnangagwa, who will hold office until elections which are expected by August 2018, when he will stand as ZANU-PF’s presidential candidate. What this means for sanctions is unclear. Mr Mnangagwa has already signalled his willingness to engage with Western governments on political and economic reforms, which would be required for sanctions to be rolled back. However, there are vested interests within his own party and within the military which will resist any change to the status quo. It remains to be seen whether Mr Mnangagwa can garner sufficient support to deliver the necessary change, but those familiar with Zimbabwe are optimistic.

Knowing your counterparty

While monitoring changes to sanctions regimes and the larger political landscape is important, it is not enough to determine where your risks lie. The other piece of the puzzle is to understand who you are doing business with. Not only should you know who the key principals are, but also who ultimately controls the company.

The impact of sanctions regimes does not stop at surface level. For example, in the case of sanctions regimes, like those imposed against Russia, businesses need to understand the ownership structure of their counterparties to assess whether they are dealing with sanctioned individuals or entities. The ultimate beneficial owners’ identities may be buried underneath the veil of offshore ownership structures, for example, or a sanctioned individual or entity might exercise control indirectly. Only companies which have invested the time to understand properly who they are doing business with will be in a position to identify those risks.

This is not an easy task. Many companies ask their prospective business partners for information directly when establishing a new business relationship. However, verifying this information independently can be a challenge, due to varying levels of transparency in corporate ownership structures in different jurisdictions.

The other challenge is how to store this information in a useable format to allow compliance teams to revisit decisions in the face of changing sanctions regimes and assess whether the business is still compliant. Businesses are increasingly using third-party compliance management software to help speed up this process. By running reports on the data they already have on their counterparties, they can quickly review their current exposure in different jurisdictions or to specific individuals.

Automated search technology is improving all of the time. However, the key to managing sanctions risks lies in a blended approach. While technology offers all manner of benefits, such as automation and automatically generated audit trails, the review of the results and the resulting decisions ultimately need to be made by informed individuals. The best compliance programmes are those that leverage technology to free up time for compliance teams to focus on the more thorny issues of sanctions, which still need creative, human intervention.


Rebecca Palser is the global product director at The Risk Advisory Group. She can be contacted on +44 (0)20 3073 9003 or by email: rebecca.palser@riskadvisory.com.

© Financier Worldwide


Rebecca Palser

The Risk Advisory Group

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