Why Sanctions have Muscled onto Treasury’s Agenda

Some sanctions, such as those imposed by the US on Cuba in the 1950s, are long-standing while others are much more recent, such as those imposed by Western nations on Russia.

For corporations and financial institutions violating sanctions, embargoes or export licensing requirements can result in costly fines and damaged reputations. In the recent past multi-million dollar fines have been imposed by regulators as they seek to ensure sanctions regimes are adhered to. In February 2014, the US government penalised nearly three dozen companies and individuals in eight countries, accusing them of evading sanctions imposed on Iran. The companies and individuals were located in countries including Turkey, Spain, Germany, Georgia, Afghanistan, the United Arab Emirates (UAE), Liechtenstein and Iran.

The lists of sanctioned companies, governments and individuals are growing as are embargoes. There are three main categories of sanctions: trade sanctions; financial sanctions; and export and trade controls. Companies that operate internationally must be aware of sanctions regimes and export controls as well as how to comply with them. It is a criminal offence to export or to facilitate trade in strategic or controlled goods and services that are subject to sanction and embargo regimes, or export controls, without a specific licence.

A Lengthy List

At present there are more than 40,000 names on various sanctions lists, which are growing at an annual rate of 20% according to Richard Tauwhare, director of Green Light Exports Consulting. The UK-based company gives advice to UK defence and security companies on expanding their exports to high-growth emerging markets.

Speaking at an International Underwriting Association (IUA) event in London on 12 September, Tauwhare said there are four main countries or organisations that instigate sanctions: the United Nations (UN), the European Union (EU), the Organisation for Security and Co-operation in Europe (OSCE), the US and the UK.

UN sanctions are imposed by the Security Council and are binding on all member states. Categories of sanctions include arms embargoes, asset freezes, and travel bans. Countries or individuals currently on the UN target list include the Afghanistan Taliban; Al Qaeda and ‘associates’; North Korea; Iran; and Libya.

The EU imposes all sanctions of the UN as well as others under what it calls ‘restrictive measures’. These measures are binding on all EU member states, businesses and citizens. The EU has arms embargoes, ‘internal repression’ embargoes, and other measures including travel bans and asset freezes. Target countries include Russia, Belarus, North Korea, Iran and Syria.

The US first employed sanctions – against the UK – in 1775. The Office of Foreign Assets Control (OFAC), the Department of Commerce and the State Department impose sanctions and embargoes. Tauwhare said it was important that companies realise that US sanctions have the element of extraterritoriality. This means that a non-US company which supplies any person on a US embargo list may itself be added to a list or prohibited from conducting business with US companies. In addition, re-exporting items or data with US content is also prohibited. These rules apply to US citizens living in other countries as well as citizens of other countries living in the US.

The long-standing US sanctions against Cuba require no direct exports to the small Caribbean island nation from the US. Additionally, US citizens are prohibited from exporting to a third country if that item will be re-exported to Cuba and they may not facilitate transactions with Cuba, even if they live in a third country. Non-US citizens may not re-export to Cuba any item incorporating more than 10% US content without a licence. Travel by US persons to Cuba is prohibited, with some exceptions.

On September 9, the Cuban government announced that US economic sanctions had cost the nation US$3.9bn in foreign trade over the past year, raising the overall estimate of economic damage to US$116.8 billion over the past 55 years. The figures were published in a report that Cuba prepares for the UN each year in requesting a resolution urging an end to the comprehensive US economic embargo and other sanctions against Cuba’s government. The UN has passed the resolution for 22 straight years with overwhelming support. Last year the vote was 188 to 2, with only the US and Israel voting against it. No other nation has an economic embargo against Cuba.

Costly Compliance

Complying with the various sanctions regimes is costly and complex, said Tauwhare. With trade sanctions, for example, the definition of an export can vary widely. Items do not necessarily have to be moved permanently to be considered an export. US and EU sanctions on Iran have focused on businesses from insurance to ship operators transporting Iranian oil. A challenge raised by this policy is that it is difficult for insurance companies to be aware of the location of every vessel they insure.

These risks can be mitigated by the use of commercial intelligence to alert the company when an insured ship enters an Iranian port, but such systems are very costly. Moreover, sanctions legislation can often leave room for conflicting interpretations, which take time to resolve.

Tauwhare said companies also should be aware that attempts will be made to evade sanctions and embargoes. He added that countries such as Iran have established a “dizzying array of front companies”. Many of these companies open and close within a few months and leave little, if any, paper trail. In order to ensure a company does not deal with sanctioned or embargoed entities due diligence must be carried out to check all individuals, customers, supply chains and distributors involved in any transactions.

Ensuring compliance with the various sanctions and embargo regimes around the world requires a top-down approach. “Compliance starts at the top with the culture of a company, which will give the policy, procedures and resources needed to comply,” said Tauwhare. As compliance is a legal obligation, it must be endorsed by the top management of a company, which also must allocate resources to compliance.

In addition to culture, policy, procedures and resources, companies should also ensure that regular training is provided for relevant staff. Given the changing nature of sanctions and embargoes, this is very important. Companies should also implement audit and review procedures to maintain a compliant approach.

If a company is in violation of an embargo or sanction, said Tauwhare, the regulators will take into account the effectiveness of that company’s compliance systems.

As sanctions and embargoes have become a favoured element of foreign policy among a number of nations, they are likely to grow and become more complex. The penalties for violation are also expected to grow. A strong compliance culture combined with a risk-based policy and clear procedures should help companies to navigate the complex world of sanctions, embargoes and trade control.

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