Firms that have carried out lawful activities in countries to which sanctions are relevant can be left at a loss, through no fault of their own, when financial institutions are unwilling to process lawful payments based on risk appetite.
The United Nations (UN) warned in June that sanctions over-compliance has harmful effects on human rights and said some financial service providers over-complied with unilateral sanctions in an attempt to reduce legal, regulatory and business risks associated with inadvertent violations.
It said over-compliance often involved banks blocking all financial transactions with a sanctioned country, entity or individual, even when some transactions are authorised by humanitarian exemptions or fall outside of the sanctions’ scope.
Over-compliance can also occur when financial institutions decide to freeze assets that are not targeted by sanctions, or deny individuals the possibility to open or maintain bank accounts simply because they are nationals of a sanctioned country - even when the individuals are refugees from that country.
The UN said: “Documented cases show that over-compliance with sanctions prevents, delays or makes more costly the purchase and shipment to sanctioned countries of goods, including humanitarian goods and services such as essential food, medicine, medical equipment and spare parts for such equipment, even when the need is urgent [or] of life-saving nature.”
It added that over-compliance can boost criminal activity by forcing companies and individuals to seek other payments routes, leading to more opaque transactions.
The UN specifically considers the situation in Afghanistan, where the sanctions targeting those associated with the Taliban have led to difficulties in getting humanitarian aid into the country. But the issues flagged in relation to that specific sanctions regime are experienced across others, like Russia and Iran - where many financial institutions adopt a blanket ban on any transactions for fear of the long-arm of the US’ sanctions regime.
While the UN’s guidance note rightly focuses on the humanitarian impacts, over-compliance also carries commercial impacts for businesses transacting lawfully in sanctioned countries.
The UN’s special rapporteur, Professor Alena Douhan, said banks and other financial service providers should review their sanctions policies, assess whether any over-compliance with unilateral sanctions has impacted the human rights of individuals, and take “prompt corrective action” where necessary.
Professor Douhan said over-compliance was driven largely by the complexity and lack of clarity in many unilateral sanctions regimes and called on states to examine whether elements of their regulations might encourage banks to over-comply with sanctions.
There are defensible reasons for adopting a risk adverse approach to sanctions compliance, particularly in relation to new and developing regimes where restrictions can be imposed in quick succession with minimal, or delayed, supporting guidance to assist compliance - Russia is one such example.
Where industry has access to clear guidance that they can rely upon, the risk of inadvertently breaching sanctions is reduced which should lead to a more realistic appreciation of sanctions risk.
Stacy Keen, Senior Associate and financial crimes specialist at Pinsent Masons