This year we witnessed a comprehensive set of multilateral sanctions issued on a major global economy, Russia. The US, UK and other countries have also hopped on to implement unilateral sanctions on Russia. However, do we fully understand the meaning of international sanctions?
Sanctions are a foreign policy tool used by countries to change undesired behaviour. Sanctions are measures that: support peaceful transitions; deter non-constitutional changes; constrain terrorism; protect human rights; promote non-proliferation; and encompass a broad range of enforcement options that do not involve the use of armed force.
Sanctions may be multilateral and therefore apply to all countries legally bound to a body, for example the United Nations. They are brought into legal effect by international treaties and codified in domestic law.
Sanctions may also be autonomous, often called unilateral sanctions, and apply to the one country implementing them. They are given a legal basis through domestic legislation and the way this takes place varies from country to country.
Sanctions can be imposed by the United Nations (UN), the biggest single multilateral organisation in the world. The 27 EU member states are the most active users of sanctions, as a foreign policy tool, in a multilateral environment. Also, the US, UK and other countries have applied unilateral sanction measures that build upon the relevant UN sanctions.
Sanctions have also evolved from country-based to thematic sanctions, which target specific issues, such as human rights. Examples are the US Global Magnitsky Act, Canada’s Sergei Magnitsky Law, the UK’s Global Human Rights and Anti-Corruption Regulations, and the EU’s restrictive measures against serious human rights violations and abuses, the most recent of the four to be adopted in 2020.
In Malta sanctions are implemented in terms of the National Interest (Enabling Powers) Act. This act provides that UN Resolutions imposing sanctions are immediately and directly applicable and enforceable in Malta. EU Council and Commission Regulations concerning restrictive measures are directly applicable in Malta, as a member state of the European Union.
The US, through the Office of Foreign Assets Control (OFAC) may also require non-US financial institutions to implement restrictive measures, more specifically, when a transaction is linked to the US, and is prohibited in terms of their regulations.
Regulated institutions in Malta need to implement, operate, and routinely update a sound risk-based sanctions compliance programme (SCP) to mitigate sanctions risks. Commitment, by senior management (SM), to supporting a risk-based SCP, is critical in determining its success.
Organisations’ sanctions obligations are likely to become more onerous- Ruth Agius
While each risk-based SCP can vary depending on a variety of factors, including the size of the institution, the products and services, customers and counterparties, and geographic location – each programme needs to incorporate:
Commitment by SM to implement, approve and periodically review the risk-based SCP. Therefore, effective controls need to guarantee adequate: engaging of human capital with technical knowledge and expertise; information technology and other resources, as appropriate; recognition of apparent violations or malfunctions, deficiencies, or failures by the institution and its personnel to comply with the law and regulations administering sanctions; implementation of necessary measures to reduce the occurrence of apparent violations in the future.
Risk assessment for the purpose of identifying potential sanctions issues that are likely to occur at top-to-bottom touchpoints, to the outside world. The risk assessment shall need to be conducted on the customers, supply chain and counterparties of the institution; the services offered; the geographical location of the institution and its operational activity, its customers, and counterparties.
Implement internal controls to include policies and procedures that identify, escalate, report, and keep records pertaining to activity that may result in regulatory breaches. Policies and procedures must: be relevant to the institution; capture the organisation’s day-to-day operations; and are easy to follow, to prevent employees from engaging in misconduct.
Internal testing and audit functions are to be accountable to SM while also being independent and having sufficient: authority; skills; expertise; resources and authority within the institution. Upon learning of a negative testing result, pertaining to its risk-based SCP, SM shall take immediate and effective action, to remediate the root cause of the identified weakness.
Training is to be delivered to all appropriate employees and personnel, on a periodic basis. Therefore, SM shall ensure that the training: provides job-specific knowledge; communicates the sanctions compliance responsibilities for each employee; and holds employees accountable for the risk-based SCP training through assessments.
As the world becomes more volatile, organisations’ sanctions obligations are likely to become more onerous. Following the global Anti Money Laundering, Funding of Terrorism and International Sanctions regulations is an absolute necessity for the regulatory well-being of any economy.
Ruth Agius is a senior analyst within the Sanctions Unit at Bank of Valletta.