Sanction Party and Lists

Sanction Party and Lists – What you need to know?

by Dr Neil Patrick – Director Client Services @ Winterhawk

I need to start with a disclaimer: I am not a lawyer and this overview document is not a legal tract. It is vitally important that customers know who they do business with: for their own security and reputation, but also for the complex compliance requirements of sanctions. There are many sanctions spanning the world created by several disconnected bodies, with often intersecting impacts, and changing all the time. Every transaction you undertake could have legal and financial impacts on your business.

What are Sanctions and Sanction Lists?

Sanctions are protective and restrictive penalties imposed on a country, companies, entities, government officials, vessels and private citizens, for breaches of international agreements. They are implemented by governments and international bodies to change behavior, prohibit illicit activity and curb undesirable actions by high-risk persons or groups that organizations deal with. Examples would be asset freezes, investment blocks, travel bans, financial sanctions, arms and trade embargoes.

Sanctions lists or Sanction Party Lists (SPL) are a compilation of individual sanctions that can be applied to individuals, countries, groups or companies. Organizations and institutions that have a legal obligation to comply with sanctions must screen for matches between entities or individuals they deal with and those in the sanctions in the lists: this can be individuals, countries, and legal entities. Sanctions lists are often collated by governments or international bodies such as the European Union.

Denied vs Restricted Parties

These two terms are often incorrectly used interchangeably, and impact an organization’s export compliance process.

Denied parties: have had their exporting privileges denied or revoked. If you sell them goods and technology which in itself may not be illegal, and if that denied party goes on to export those goods and technology, it would be an export compliance violation and you would be complicit in the violation.

Restricted parties: trade or business transactions related to certain specific goods or technologies is restricted (if a partial restriction), or no business is allowed to be conducted with them (if a total restriction).

Politically Exposed People

This is an important sanction subset used in for example anti-money laundering and anti-bribery.

A Politically Exposed Person (PEP) is a person in an influential and prominent position operating within a domestic or foreign capacity. PEPs have access to resources, power and systems (especially financial), can influence government and policy, and manipulate people. The intended outcome is personal illicit gain and advantage.

A PEP list is a database of Politically Exposed Persons including the names and aliases, and family members, of individuals who hold prominent public positions.

For anti-money laundering purposes, obliged entities are required by regulation to perform enhanced due diligence screening for all politically exposed persons, domestic and overseas, both in office and having left office, including their family members and close associates.

Types of Sanctions

There are a number of dimensions by which sanctions can be classified. The same target can have several types of sanctions applying to them. An abridged summary includes:

Economic sanctions: penalties imposed on target countries, their officials, or their citizens. Trade and financial transactions are restricted to deter, punish, or charge them if they violate international norms of behavior. This can include economic, political, or diplomatic levers that are intended to affect the target’s economic health.

Diplomatic sanctions: restrict any country’s diplomatic benefits leading to diplomatic isolation, suspension of diplomatic relations, access to the global community, and expulsion of diplomats. They pressure the targeted country to change its behavior.

Military sanctions: political and military trade penalties, reducing a country’s capacity to perform military-related financial transactions, procure military weapons & military technologies, and also restrict fly zones. They reduce the capacity for military interventions.

Sports sanctions (related to ‘sports washing’, a form of money laundering): imposed when any individual, group, or organization is found legitimizing their illicit funds or wealth using sports events or companies.

Environmental sanctions: driven by evidence of environmental crimes that causes severe damage to our environment such as illegal pollution of soil, water, trade or illegal shipping of plastic waste abroad. These are enforced through fines, withdrawal of licenses, or bans on access to public funding.

Who Creates Sanctions, What is their Scope?

There are multiple sanctioning bodies with their own sanctions lists, including sovereign states, regional unions and international organisations. They don’t always align, and several could apply at the same time. It is usually the member states who are responsible for implementing and enforcing sanctions.

The main bodies are:

The EU has a very useful Sanctions Map  for finding out types of sanctions and where they apply.

How Often Do They Change?

Sanctions lists are evolving constantly. We live in a very volatile and fragile global political environment at the moment. Governments increasingly rely on sanctions as a tool for enforcing political foreign policy, instead of direct conflict. The entities named in sanctions lists change all of the time. As with other compliance regulations, the number and scope of sanctions has increased significantly over the last few years, and every indication is they will continue to do so.

Of note is the EU Sanctions Map was last updated less than 2 weeks before this article, indicating the information changes often.

Due to social media and non-stop news cycles, PEP lists are in a daily state of flux as people gain and lose power and influence. Furthermore, PEPs retain significant influence long after leaving office. Regulation requires they be monitored for at least 12 months afterwards, but most organisations do so for much longer. Even deceased PEPs require caution if they pass wealth on to others.

Do I have to comply with Sanctions, and what is the risk?

Sanctions screening is important for businesses to remain compliant with international sanctions, avoid penalties, and protect the national security of the countries they operate in.

Consequences of sanctions violations have included fines and restrictions on business activities, plummets in share price, compromized ability to attract financing, loss of trust and customers, employee churn, damaged reputation and credibility.

It is every organization’s legal obligation to comply with export compliance regulations that are applicable to them, and they need to maintain their own denied party lists to ensure this is comprehensive. Organizations that are not exporting should be screening as individuals and entities within their own country may be on watch lists. Doing business with them could trigger a compliance violation.

Historically enforcement actions have been more prominent in Financial Services, but this is changing. For example the Office of Financial Sanctions Implementation (OFSI) has published financial sanctions guidance for charities and non-governmental organisations.

How to deal with Sanctions and PEP’s

Sanctions screening is a due diligence process that checks if individuals or entities you currently interact with or are planning to, are on a Sanctions or Watchlist. The checks should be are risk assessed within the context of your risk appetite and relevant sanction regimes that may apply to business operations.

Since sanctions and PEP lists are constantly changing, an entity that was not on a list yesterday may be on a list today. It is therefore highly advisable to screen all entities you engage with at the first point of contact as well as every time they are dealt with.

Having a software system in place for dealing with sanctions will significantly reduce the risk of violations as well as the cost of performing compliance checks, and help keep up to date with changing lists.

Take a closer look at Winterhawks Packages, including Sanction Lists here

About the Author

Dr Neil Patrick

I should note that for the last 5 years until joining Winterhawk I have been SAP’s Solution Manager for SAP Risk and Assurance Management (SAP Financial Compliance Management when it was first released). I was instrumental in bringing it to market and helping it grow to the innovative solution it is today. I am still passionate about the solution, and I’m very pleased to now be at Winterhawk adding client value to deploying the solution.