Cumplimiento de sanciones: la importancia del cumplimiento de sanciones

Sanctions Compliance

It is difficult to find someone who has never heard of sanctions and sanctions compliance. It is even more difficult to find someone with a small idea of how sanctions work, what types they can be, and how they affect the work of business entities. At the same time, these issues often arise in everyday economic activity, and their solution and justification are extremely important.

Our lesson will not be about why sanctions are imposed. Instead, you will learn how they can affect entrepreneurs’ work. Sanctions are changing rapidly, but the general and basic «rules of the game» have already been formulated. In the globalized world, you must be careful to avoid financial or reputational risks to your company, especially if the company conducts foreign economic activity.

Hiring by banks and other large corporations of specialized persons responsible for compliance is not a fashion trend but a necessity. The consequences of violating sanctions are too serious, and such risks may jeopardize the company’s existence.

Sanctions Compliance

First and foremost, it is necessary to establish what economic transaction is being checked for sanctions compliance to conduct effective compliance expertise for sanctions. Immediately after that, you need to answer three questions:

  • What is forbidden to do?
  • For whom is it forbidden?
  • On what territory is it forbidden, and on what territory will there be adverse consequences in case of violations?
«What is forbidden to do?» 

Most lawyers and compliance managers make premature and superficial conclusions about the prohibition of a particular transaction only because a counterparty is on some sanctions list. The presence of a company on the sanctions lists is the first «shot,» but it is far from a prohibition on an economic transaction. Each transaction should be considered comprehensively from the peculiarities of the answers to the three questions mentioned earlier. If clear and reasonable answers are obtained, it is possible to conclude the compliance or non-compliance of the transaction with the current legislation.

Sanctions Compliance: Personal and Sectoral Sanctions

It is advisable to divide sanctions into personal ones against specific individuals and/or legal entities, as well as sectoral ones against an indefinite number of persons. They are aimed at a specific industry of the economy of a particular state. At the same time, sanctions work comprehensively. The persons who have violated sectoral sanctions will be added to the list of persons subject to personal sanctions.

Regarding personal sanctions, they restrict certain services, usually banking ones, to certain persons, including blocking assets, prohibiting lending, etc. It is important to understand that a clear list of prohibited transactions is always determined. For example, in the case of a prohibition on lending to certain persons for more than 14 days, supplying raw materials or other goods to such persons is not prohibited.

Regarding sectoral sanctions, a prohibition on the supply of certain goods and services to certain sectors of the economy is meant, which can be a prohibition on the supply of technology for the development of the continental shelf, the oil extracting industry, the energy industry, food products, etc.

A clear answer to the first question should be sought in the regulatory legal acts that impose sanctions, which is not a theoretical but a purely practical issue.

Sanctions restrictions may apply to the following:

  • Banks and other financial institutions, such as a prohibition on lending, a prohibition on withdrawal of capital, etc.
  • State authorities with a prohibition on issuing licenses, revocation of permits, etc.
  • Ordinary business entities with a prohibition on commercial transactions.

After researching the presence or absence of a prohibition on a company’s economic transaction, we move on to the answer to the next question.

Sanctions Compliance
«For whom is it forbidden?«

Let’s talk about Ukraine’s general rules and local legislation, then at present. The issue of sanctions is regulated by the Law of Ukraine «On Sanctions,» as well as by the decisions of the National Security and Defense Council of Ukraine. These acts specify the type of sanction and on whom it is imposed. It is impossible not to thank the national legislator for such a simple and clear system of imposition of sanctions and the quality of a legislative technique having conducted detailed compliance expertise with the study of primary sources.

The general rule is that the state that imposes sanctions extends them to its residents and the persons conducting their activity on the territory of such a state.

In globalization, many enterprises will fall under this definition in one way or another, and violating US sanctions is very risky.

Examples from the USA are the most appropriate in this context, as the US dollar is the most widespread currency in the world and every transaction with such a currency involves a US person, a correspondent bank, which in turn will accurately check a transaction for sanctions compliance.

“On what territory is it forbidden, and on what territory will there be adverse consequences in case of violations?”

This question can be the most ambiguous. It is important to divide sanctions according to the principle of the territories on which they are imposed because no state has supranational sovereignty and can prohibit certain activities on the territory of another country. At the same time, states have the right to set certain consequences that will be applied to their territory if a person takes any actions on the territory of another country.

A clear example is the blocking of assets in the USA and the EU of the companies that violate sanctions against Iran and the Democratic People’s Republic of Korea. The USA cannot prohibit the sale of ammunition to the army of the DPRK, but it will be extremely difficult for such a supplier to enter the American market. Thus, the territory of a violation may be outside the state imposing sanctions, but adverse consequences occur on the territory of such a country.

Territorial issues are also rather vague because large corporations have their representative offices in many states. In such cases, it is necessary to analyze the ownership structure to assess risks and to gain a clear understanding of whether a transaction will be legitimate. Sanctions can be imposed on one company from a corporation. In such a case, working with other group members will also involve serious risks, as you will have to be careful and ensure that your products are not resold to the company subject to sanctions.

Thus, in the ideal picture of the world, a compliance manager answers three main questions, specifies the regulatory framework, and gives a clear conclusion about whether a transaction is legitimate or illegitimate. This information is recorded, and in case of doubt, the company has evidence of its conscientiousness. But sometimes, this is not enough.

It is very good when a compliance manager decides to look for any additional information after seeing the name of a counterparty on the sanctions lists and, at this stage, has not prohibited a transaction. In addition to the legal side of the issue and the possibility of proving in courts the right to conduct an economic transaction, there is also a reputational component of a company that cannot be ignored.

Sanctions Compliance

Suppose no legal prohibition on an economic transaction is discovered, but the answer to at least one of the questions is positive. In that case, such a transaction will still be risky regarding business reputation. In this case, the business owner will have to compare the potential profits from such a transaction and the potential losses in case of a negative impact on reputation. Such losses should not be exaggerated, but they should not be neglected at all either.

It has already been mentioned that sanctions are unstable and rapidly changing matters. No one can guarantee that your counterparty will not get on the sanctions list after signing an agreement, as the result of which the execution of the already signed agreement may involve significant risks.

In such a case, the protection tool can be agreement clauses, according to which the imposition of sanctions on your counterparty in the future can be grounds for the termination of the cooperation agreement. Moreover, the presence of the agreement guarantees and assures that the parties are not prohibited from concluding and executing the agreement because sanctions can be one of the proofs that your company acted conscientiously in case of sanction violations by the counterparty you became a victim, not an accomplice-violator.

In summary, sanctions are prohibitions and restrictions established by lawTherefore, they are subject to all the requirements of the current local and international legislation governing such restrictions and prohibitions in other fields. The issue of compliance is very important today. For the stable functioning of business, it is necessary to be completely sure of following sanctions compliance. In case of any doubt concerning a transaction, conducting full detailed compliance expertise is necessary.

Final Thoughts

Compliance with sanctions against foreign entities necessitates far more than simply checking a list of restricted companies and individuals. When considering a company’s «combined ownership of more than 50% by sanctioned parties,» for example, additional non-list-based requirements may present potential compliance pitfalls. Up-to-date data, combined with the right screening technology, can help your organization avoid fines and unnecessary compliance costs.