What is a Sanction?
A sanction is a tool of foreign policy designed to change or punish the behaviour of another country or entity. Sanctions can range from a ban on trading to extra tariffs placed on selected goods and/or restrictions on financial transactions.
The most common types of sanctions currently in use or used in the UK are:
- Targeted asset freezes usually applied to individuals, entities and bodies, restricting access to funds and economic resources.
- Restrictions on a wide variety of financial markets and services. These can apply to named individuals, entities, and bodies, to specified groups or to entire sectors. These can take the form of investment bans, restrictions on access to capital markets, directions to cease banking relationships and activities.
- Directives to cease all business of a specified type with a specific person, group, sector, or country.
- immigration sanctions, known as travel bans
Who administers and enforces sanctions?
- The Foreign & Commonwealth Office (FCO): is responsible for negotiating international sanctions and has overall responsibility for the UK’s policy on sanctions and embargoes. The FCO has broad oversight for sanctions policy in the UK. However, responsibility for administering and enforcement of sanctions in the UK is delegated to various government departments.
- HM Treasury: implements and enforces financial sanctions, through its Office of Financial Sanctions Implementation (OFSI). OFSI helps to ensure that financial sanctions are properly understood, implemented and enforced in the UK.
- UN Sanctions: UN sanctions derive from UN Security Council Resolutions which require nation states to implement local legislation to comply with the Resolutions.
- UK Border Agency: administer travel bans.
What are the obligations for insurance firms to comply with sanctions screening requirements?
The sanctions regime imposes serious and extensive restrictions on dealing with people and entities who are listed. Under the legislation they’re referred to as “designated persons”.
The law restricts you from:
- receiving payment from or making funds available to designated persons
- dealing with their economic resources
- making even legitimate payments to those persons
What is the process of sanction screening?
Sanctions screening involves screening individuals, groups or companies against designated sanction lists according to the territories in which an organisation trades, the currencies they trade in, and their partnerships and alliances.
This can take the form of manually inputting a name into an online search tool, checking a customer database for any sanctions alerts, or automatically screening customer and stakeholder databases regularly.
You may apply a risk-based approach to setting up a system that checks your clients and counterparties against the sanctions lists.
Factors that may increase the risk of a person being on the sanctions list, and so increase the reason for checking the list, include:
- clients or transactions with links to jurisdictions subject to sanctions, even if the clients are based locally
- clients or transactions involving policitally exposed persons (PEPs)
- clients or transactions involving complex corporate structures in jurisdictions with high terrorist financing risks
- clients who seem unable to receive funds or send funds from a bank account in their name, for no good reasons
However this list is not exhaustive and you should have a risk assessment and policy in please for your own sanctions checking processes. With lists and risks changing daily, the only robust approach is to screen all clients and counterparties on a regular basis.
What are the implications if you ignore this?
It is a criminal offence not to comply with a sanctions order currently in place.
The Terrorist Asset Freezing etc. Act 2010 created a series of criminal offences. It prohibits:
- dealing with the funds of designated persons
- making funds, financial services or economic resources available, directly or indirectly, for the benefit of designated persons
Additionally, you must not knowingly and intentionally participate in activities that would directly or indirectly circumvent these financial restrictions or enable or facilitate the commission of any of the above offences.
Individual: Although the penalties can vary depending on the nature of the sanctions breach, a general guideline is that individuals found guilty of a sanctions breach can face imprisonment for up to 7 years and/or unlimited fine.
Corporate entities: A fine either 50% of the total breach value, or up to £1 million (whichever is greatest). If a sanctions breach was committed with the consent of any given individual, that individual can face imprisonment and/or fine alongside the corporation.
What you need to know about new sanctions on Russia
With the UK government imposing a tranche of sanctions on Russia in response to the situation in Ukraine, make sure you’re up to date with UK sanctions obligations.
This sanctions regime is aimed at encouraging Russia to cease actions destabilising, undermining or threatening the territorial integrity, sovereignty or independence of Ukraine.
All firms regulated by the Financial Conduct Authority must have appropriate policies in place to make sure they comply with sanctions legislation. This includes carrying out regular and appropriate checks of sanctions lists.
The Russia sanctions regime
The Russia (Sanctions) (EU Exit) Regulations 2019 came fully into force on 31 December 2020. They are intended to ensure that certain sanctions relating to Russia continue to operate effectively.
You should review the Russia (Sanctions) (EU Exit) (Amendment) (No. 4) Regulations 2022, and the Russia (Sanctions) (EU Exit) (Amendment) (No. 5) Regulations 2022, laid on 1 March 2022.
You should also review the Sanctions (EU Exit) (Miscellaneous Amendments) (No. 2) Regulations 2020, the Sanctions (EU Exit) (Miscellaneous Amendments) (No. 4) Regulations 2020, the Russia (Sanctions) (EU Exit) (Amendment) Regulations 2022, the Russia (Sanctions) (EU Exit) (Amendment) (No. 2) Regulations 2022 and the Russia (Sanctions) (EU Exit) (Amendment) (No. 3) Regulations 2022 to find out any amendments made to the Regulations.
Automating Counterparty Diligence
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