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Financial Sanctions Due Diligence - Guidance for Businesses

Author: Syedur Rahman  10 April 2024
10 min read

What are financial sanctions?

Financial sanctions are restrictions imposed by a country (such as the UK) or an international body (such as the European Union or United Nations) on an individual, organisation, region or country.

They can be used as a way of restricting access to certain financial services (such as banking), resources or financial markets. For example, the target of sanctions imposed by a country may not be able to move money through that country’s banking system. 

What is the aim of financial sanctions?

Financial sanctions can be imposed for a variety of reasons.

These reasons include:

  • Achieving a specific foreign policy or national security objective.
  • Denying a sanctions target access to key resources needed to continue their behaviour, such as waging war, the financing of terrorism or the spread of nuclear weapons (known as nuclear proliferation).
  • Indicating disapproval of certain activity.
  • Protecting the value of assets that have been taken from a country until those assets are returned to their rightful owners.
  • Limiting the ability of sanctioned targets to enjoy any economic, financial or social benefit they would ordinarily enjoy in the country imposing the sanctions.

Types of Financial Sanctions

Financial sanctions come in a number of different forms. They are developed and imposed as a response to a particular situation. 

The most common types of financial sanctions are:

Targeted Asset Freezes

These apply to named individuals and organisations and prevent access to funds and economic resources. 

Restrictions on Financial Markets and Services

These are applied to named individuals, organisations, companies, groups and business sectors.

They usually take the form of: 

  • Investment bans.
  • Restrictions on access to capital markets – the financial markets where money is raised for investment.
  • Directions to cease banking relationships and activities.
  • Requirements to notify authorities that certain payments are being made or received or to seek permission for such activity.
  • Restrictions on the provision of financial, insurance or other financial services.
  • Directions to cease all business.

These will specify the type of business and can apply to a specific person, group, sector or country.

Financial Sanctions UK Legislation

In the UK, the main pieces of legislation relating to sanctions are:

The UK implements a range of sanctions regimes through regulations made under the Sanctions and Anti-Money Laundering Act 2018. This Act provides the main legal basis for the UK to impose, update and lift (remove) sanctions.

UK sanctions regulations made under this Act apply in the whole of the UK, including in Northern Ireland, and apply to conduct by UK persons. This includes anyone in the UK (including its territorial waters), UK nationals outside of the UK, and bodies incorporated or constituted under the law of any part of the UK.

In some instances, where the scale of sanctions is unprecedented, there may be other sources of legislation and advice. To take Russia as an example, the UK has issued the Russia Regulations, and guidance and Financial Sanctions FAQs have been produced by the Office of Financial Sanctions Implementation (OFSI).

Who implements sanctions in the UK?

While it will vary from country to country, there will be one or more government bodies in a nation that will implement sanctions.

In the UK, the government bodies involved in sanctions are:

  • The Foreign, Commonwealth and Development Office (FCDO): Responsible for the UK’s international sanctions policy, including all international sanctions regimes.
  • HM Treasury: Implements and enforces financial sanctions through its Office of Financial Sanctions Implementation (OFSI). Someone subject to an asset freeze in the UK will be listed on OFSI’s Consolidated List
  • The Department for Business and Trade: Implements trade sanctions.
  • The Department for Transport: Implements and enforces sanctions in the aviation and maritime sectors and controls movement of ships and aircraft in UK waters and airspace.
  • The Home Office: Implements immigration sanctions (also known as travel bans).
  • HM Revenue & Customs (HMRC): Brings criminal actions relating to breaches of trade sanctions.
    .
  • The National Crime Agency (NCA): Investigates and enforces breaches of financial sanctions.

Who implements sanctions in the EU?

The United Nations (UN) imposes financial sanctions in the European Union and requires member states to implement them through resolutions passed by the UN Security Council.

Who needs to comply with financial sanctions?

Sanctions imposed by a country, such as the UK, will apply to all persons within that country’s territory and territorial sea, and to all people who are from that country, wherever they are in the world. 

To take the UK as an example, this means that:

  • All individuals and legal entities who are within or undertake activities within the UK’s territory must comply with UK financial sanctions that are in force.
  • All UK nationals and legal entities (such as organisations or companies) established under UK law must also comply with UK financial sanctions that are in force, no matter where their activities take place.

Why is sanctions due diligence important? 

Any individual or company involved in business needs to carry out due diligence (meaning all possible checks) to make sure they are not breaching sanctions. 

Any person or company found to be doing business that breaches a sanction (or sanctions) will face severe penalties, not to mention damage to their reputation.

Performing due diligence in relation to sanctions can be necessary to screen clients or prospective clients to ensure that they are not a designated person under applicable sanctions regimes – meaning they are the subject of sanctions. Due diligence can also be necessary in more complex deals, such as when one company merges with or acquires another.

The UK’s financial regulator, the Financial Conduct Authority (FCA) has stated that wilful blindness in relation to sanctions checks will be viewed as involvement in sanctions offences.

In 2023, the UK Office of Financial Sanctions Implementation (OFSI) amended its guidance to make clear that if there has been a breach of sanctions legislation, a failure to carry out appropriate due diligence will be an aggravating factor when deciding the appropriate penalty.

The National Crime Agency (NCA) has also emphasised the importance of undertaking appropriate due diligence.

It is important, therefore, that those in business make sure they have done all they can to make all possible checks in relation to sanctions.

Sanctions Due Diligence Considerations

Conducting enhanced due diligence is a vital way of ensuring you are not doing business with a sanctioned person or company.

The main issues to consider as part of your due diligence are:

  • Which sanctions regimes are relevant to your business?
  • Is anyone you do – or might do – business with sanctioned or connected to another person or organisation that is sanctioned?
  • Are those that you do – or might do – business with considering sanctions risks as part of their own compliance procedures?

Those in business have the responsibility of ensuring that they are carrying out all appropriate checks on current or potential business partners to address these issues

Depending on the precise situation, this can mean:

  • Carrying out an in-depth risk assessment of any potential deal.
  • Examining all aspects of a client or potential client’s activities, including the nature and location of its business and its owners, personnel, investors, shareholders, customers and any other third parties.
  • Screening all individuals involved for possible sanctions risks.

How to Identify Sanctioned Individuals and Entities

Countries tend to publish lists of those that are the subject of its sanctions. For example, the United States list is published by the Office of Foreign Assets Control (OFAC), which is a financial intelligence and enforcement agency of the US Treasury Department.

In the UK, HM Treasury’s Office of Financial Sanctions Implementation (OFSI) publishes its Consolidated List of all those who are subject to asset freezes.

OFSI also maintains a list of people subject to financial and investment restrictions.

The Foreign, Commonwealth and Development Office (FCDO) publishes the UK Sanctions List, which provides details of those designated or specified under regulations made under the Sanctions and Anti-Money Laundering Act 2018. The list also details which sanctions measures apply (for instance financial, immigration, trade or transport sanctions) to them.

OFSI works closely with the FCDO to ensure the respective lists are aligned. These lists can be referred to by anyone looking to make checks to see if any person or company they do business with (or are thinking of doing business with) has been sanctioned.

How to Use OFSI Lists

The OFSI lists contain a range of information to aid the identification of persons, companies or organisations subject to financial sanctions. It is important to use this information to make checks on anyone you do – or are thinking of doing - business with.

For an individual, this information can include;

  • Their full name.
  • Their aliases.
  • Their date and place of birth.
  • Their nationality.
  • Their passport details.
  • Their national ID details.
  • Their addresses.
  • Their position or role in any particular organisation.

If the name of an individual, company or organisation matches one or more entries on the OFSI lists, this is known as a name match. But it does not necessarily mean that the individual, company or organisation that you are dealing with is the same one as the one on the list. If all the information on an OFSI list matches, this is referred to as a target match.

If you are unsure whether you have a target match, you need to contact OFSI for assistance. If you are satisfied that your business contact is not on an OFSI list, no action needs to be taken. But if you do have a target match, the correct course of action will depend on the specific sanctions that apply. OFSI has published guidance about this along with its lists.

Ownership and Control of Sanctioned Entities

If a person, organisation or company is on a country’s sanctions list, it can be relatively straightforward to identify them. Those who have been, or were thinking of, doing business with them can then take appropriate action to ensure that they do not breach sanctions.

However, carrying out due diligence can face two main challenges:

  1. Designated persons (those who are subject to sanctions) will often make a great effort to hide their connection to particular entities (such as a company) or assets (such as a property). This makes it difficult to identify who may be directly or indirectly involved in any particular business deal.
  2. There can be no single reference point for determining exactly which due diligence measures should be carried out in any particular situation. Although guidance has been published by the likes of the Office of Financial Sanctions Implementation (OFSI), the Financial Conduct Authority (FCA),  the UK Joint Money Laundering Steering Group and the National Crime Agency.

When the situation is not clear and obvious, this is often because the ultimate beneficial owner (UBO) of a company or an asset (such as a superyacht) is not made publicly known

The UBO is the person who is responsible for, ultimately owns or controls a company or asset.

For example, a company may be registered as having a particular owner but another person may be the one who actually has control of it and / or reaps the benefits of it. That person (the UBO) will be the one making all the major decisions regarding the company and receiving most (if not all) of the profits it generates.

A UBO may not show up on a country’s sanctions list, such as the UK’s OFSI Consolidated List, as they may not officially have a certain number of shares or voting rights in a sanctioned company. 

There is also the situation that when a person is designated (sanctioned), anything they own or control directly or indirectly (an entity) will also be subject to financial sanctions. 

An entity may not appear on a country’s sanctions list under its own name. But the fact that it is owned or controlled by a sanctioned person makes it subject to sanctions.

Identifying The Ultimate Beneficial Owner

An entity is owned or controlled directly or indirectly by another person in any of the following circumstances:

  • The person holds, directly or indirectly, more than 50% of the shares or voting rights in it.
  • The person has the right, directly or indirectly, to appoint or remove a majority of the board of directors of the entity.
  • That person would be able to ensure the affairs of the entity are managed in accordance with the person’s wishes. 

In such circumstances, if the person who owns or controls the entity is sanctioned then financial sanctions will also apply to that entity. Here are two examples;

  1. Company A is not on OFSI’s Consolidated List but its majority owner is Mr B, who has been sanctioned, then Company A is subject to the same restrictions as Mr B.
  2. If Mrs X is not listed on OFSI’s Consolidated List but is shown to be a friend or family member of the sanctioned Miss Y, and Miss Y is using Mrs X to enter into transactions, then Mrs X is subject to the same restrictions as Miss Y.

What should I do if my client/customer is a potential sanctions match?

If you have business dealings with a person or organisation that may be on a country’s sanctions list you must:

  • Stop all transactions. If financial sanctions apply to a current or potential trading partner, no transactions are allowed. You are prohibited from carrying out certain activities or behaving in a certain way if financial sanctions apply. You should always refer to the up-to-date version of the sanctions legislation to understand exactly what is not allowed.
  • Report the matter to your company’s Money Laundering Reporting Officer (MLRO) or money laundering compliance officer (MLCO), with a view to contacting the authorities.
  • Seek legal advice to ensure you are meeting all your legal obligations

Reporting Obligations to OFSI

Under the Sanctions and Anti-Money Laundering Act 2018,  some types of firms are required to inform OFSI as soon as practicable if they know or reasonably suspect a person is a designated  (sanctioned) person or has committed offences under financial sanctions regulations. OFSI also has the power to request information in relation to suspected breaches of sanctions.

When reporting to OFSI you must include:

  1. The information on which the knowledge or suspicion of a sanctions breach is based.
  2. Any information you have about the person you are reporting which can help them be identified.
  3. The nature and amount of funds you hold for that person if they are a customer.

Legal advice should be sought if you are unsure about anything to do with the need to report matters to OFSI.

All UK sanctions regulations (and the reporting obligations) apply to United Kingdom individuals or entities regardless of where they are in the world.

Reports should be submitted to OFSI using the form on the government website. Read the government guidance on reporting information to OFSI.

What are the penalties for breaching financial sanctions?

Breaches of financial sanctions are a serious criminal offence. Offences carry a maximum sentence of seven years’ imprisonment if the case goes to the Crown Court or up to 12 months’ imprisonment if the case is heard at a magistrates’ court.

Breaching financial sanctions legislation is included on the list of offences for which a deferred prosecution agreement (DPA) can be made. DPAs are court-approved agreements between a company and a prosecutor, where a prosecution is suspended providing the company agrees to meet – and continues to meet – certain conditions.

Breaches of financial sanctions are also on the list of offences for which a Serious Crime Prevention Order (SCPO) can be imposed. These can involve restrictions being imposed on someone’s activities in order to prevent further involvement in wrongdoing.

The UK Treasury’s Office of Financial Sanctions Implementation (OFSI) has the power to impose a monetary penalty (a fine) for breaches of financial sanctions. OFSI will first work out the maximum penalty it could impose, which will be the greater of £1 million or 50% of the value of the breach of sanctions. OFSI will then decide what level of penalty is reasonable and proportionate, depending on the circumstances of the case.

Conclusion

It is important that those in business are aware of how sanctions can have an impact on their activities. It is equally important that they know how to comply with sanctions by carrying out the necessary checks. They must also make sure that they report any sanctions-related information as swiftly and comprehensively as possible - and in the right way.

There is little doubt that sanctions is a constantly-changing area of law . It presents a range of challenges for those looking to make sure they do business in a way that does not break the law.

For those that want to ensure this, it can be worthwhile seeking independent legal expertise to ensure they meet those demands placed upon them. This can be the best way of avoiding the damaging effects of involvement in a sanctions breach.

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Syedur Rahman

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Syedur Rahman is known for his in-depth experience of serious fraud, white-collar crime and serious crime cases, as well as his expertise in worldwide asset tracing and recovery, international arbitration, civil recovery, cryptocurrency and high-stakes commercial disputes.

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