The evolution of international economic sanctions measures in 2022 has demonstrated the importance of having a structured approach to analyzing regulatory developments. A person who attended a seminar in 2021 and learned everything there is to know about current sanctions regimes (at the time) may very likely still have been unprepared for what unfolded in 2022.
The key is to understand the types and structures of economic sanctions, and develop a framework in which new sanctions measures can be better integrated.
At the time of writing, the EU alone has implemented eight so-called “packages”, which comprise over 50 legislative measures published in the official journal. Experienced practitioners in globally active firms know the importance of also monitoring the measures of other significant jurisdictions, such as the USA, UK or Switzerland, which results in an even higher number of publications, not to mention supplementary guidance (such as Frequently Asked Questions – FAQs), all of which needs to be analyzed, transmitted into internal policies and procedures and communicated.
And this is just concerning the Russian aggression against Ukraine. Keep in mind there are already about 30 other sanctions regimes concerning various international conflicts and issues that are also constantly evolving.
The optimal approach for the responsible compliance officer initially depends on the business profile of his or her firm, because not all of the restrictions and prohibitions will have an impact on the firms business, depending on what markets and types of clients are served, and what products and services are offered. A financial services firm may need to focus less on trade restrictions (i.e. prohibitions on certain imports or exports) unless that firm is financing affected trade transactions. A small manufacturer of goods will not have to understand what exemption might apply for blocked accounts, but might need to focus more on restrictions related to the manufactured goods and his suppliers.
Another important aspect is distinguishing financial sanctions from the increasing number of other restrictions. Financial sanctions essentially have two components: You need to block the funds of anyone that is on the sanctions list and you may not make funds available to such a person.
Until 2014, compliance with economic sanctions was comparably straight forward: You monitored the sanctions list for new amendments, and screened your accounts and transactions for any matches, in which case you froze accounts or blocked transactions as necessary. (Note: this is a simplification, but a more detailed description would go beyond the scope of this article)
Then came the introduction of what are called Sectoral Sanctions. In simple terms, this meant the introduction of an additional list of sanctions parties but being on this list did not mean your account needed to be frozen. Rather, the restriction associated with this list were more nuanced, e.g. relating to certain debt- and securities-related transactions. This also meant that there remained some permissible business with entities subject to sectoral sanctions.
The added complexity introduced in 2014 has now been expanded further in the measures enacted in 2022. The new restrictions are related to certain regions (such as Donetsk and Luhansk) certain sectors (aviation, maritime), certain goods (such as luxury goods), certain services (such as financing, investment services, taking deposits) or a combination of these.
From a foreign policy perspective, this approach makes sense. Governments have long ceased imposing embargoes on entire countries (as was the case with Cuba and Iraq), because the unintended consequences for the civilian population were untenable. Since then, more targeted sanctions (also sometimes referred to as “smart sanction”) are intended to exert pressure only on the persons, governments or organization responsible for a given conflict, while minimizing disruptions to related markets. Also, as foreign policy instruments, these measures must be carefully calibrated in terms of the escalation they might cause among nations.
However, the reality for firms, and in particular for the compliance professionals within those firms, is, an increasingly complex set of rules that change frequently, often without grace periods for implementation, and generally combined with harsh standards of civil and criminal liability. These need to be communicated through policies, procedures and training and often implemented with the help of IT-supported systems and controls. This is already a challenging endeavor for most firms with some form of international business. The more sanction measures target countries such as Russia and China, the more these demands will increase.
It is worth noting that this is not just a matter of legal analysis. While that is often an important first step, the complexity of the sanctions measures increasingly require firms to make internal policy decisions in order to enable internal workflows to fully observe applicable restrictions while maintaining operational effectiveness and efficiency.
Much has been said and written about the value of artificial intelligence, process automation, or other technical wonders to make the implementation of compliance requirements more (cost-) effective and robust. In the case of evolving economic sanctions, these tools are only as effective as the underlying analysis of the impact on and risks to the covered firm.