Sanctions Digest: The Changing Sanctions Environment
01 Sep. 2022
The events of the last few months have changed the way Sanctions regimes are being implemented around the world.
Deloitte has designed a series of blogs exploring the evolving global Sanctions landscape. These blogs will offer insight about how organisations can adapt to meet the challenges presented by these changes, as well as practical steps that can be adopted to help continuing compliance with regulatory obligations. This will include:
- How organisations can best respond to Sanctions screening and operational challenges whilst mitigating the risks in complying with Sanctions
- How technology can enable enhanced Sanctions compliance
- How organisations can move from a "Reactive" to "Proactive" approach to Sanctions Compliance
- How organisations can prepare for the possibility of further expansions of Sanctions regimes.
As the first in this series, this blog considers how Sanctions have changed in recent months and highlights the ongoing challenges organisations may face as they align with rapidly changing regulatory requirements.
Changes to the Sanctions Landscape
With the invasion of Ukraine by Russia, the speed, scope, and scale of sanctions regimes being implemented have required organisations to make changes very quickly to their Sanctions program to comply with these new regimes on an ongoing basis.
Sanctions in their nature are political. Generally, defined as "measures not involving armed force that are imposed to bring a situation of international concern to an end by influencing those responsible; to limit the adverse impacts of a situation; or to penalise those responsible." Because of this political perspective, historically it has often been possible to predict when and where sanctions may be applied based on geo-political events.
As an example, following the annexation of Crimea and Sevastopol by Russia in 2014 targeted sanctions were implemented by the West nations in those occupied areas. Fast forward to 2022 and as Russia's military aggression escalated again this year; the parallel escalation of sanctions measures was an expected response. What perhaps was not expected was the speed and severity of the new restrictions applied on Russia. In the space of a week, the EU, US, and UK had increased their sanctions from localised measures in the Donetsk and Luhansk areas of Ukraine, to comprehensive restrictions on Russia's political figures, financial institutions, industry sectors and trade goods.
Traditionally, the implementation of sanctions was a ponderous process that involved rounds of diplomacy and research before any measures where imposed. The war in Ukraine forced a rapid response from those opposing it that simply did not allow time for such consideration to take place. Instead, we saw a shift whereby politicians and nations states acted decisively and determinedly to blunt Russian efforts. Only with the recent EU sanctions around oil embargoes have we seen a return to the old ways of negotiations and deliberation – indecision that drew much public criticism as it allowed billions of Euros in revenue to flow into Russia and fund their war efforts.
This rapid escalation and implementation of restrictions has placed an increasing demand on organisations to maintain up to date controls and risk processes. In an environment where what was legal last week may not be next week, an adaptive approach is required to ensure ongoing alignment to regulatory requirements.
Differing Sanctions regimes across jurisdictions -
A further challenge is that not only are sanctions requirements changing at a rapid pace, but they are also different depending on the jurisdiction(s) an organisation operates in. As events unfolded in Ukraine, despite its strong condemnation, the UN was unable to place any economic sanctions on Russia because all sanctions must be approved by the UN Security Council – upon which Russia has a permanent seat and holds 'veto powers'. With no UN mandated sanctions against Russia, there was no international law requirement to apply any restrictions on Russia. Instead, the decision and responsibility to apply any measures falls on individual countries and nation blocs. Nations had to decide who, what and when to sanction, and for many this was their first ever autonomous sanctions legislation. For example, New Zealand passed their first ever autonomous sanctions laws, Singapore passed their first set for 40 years, and Switzerland set aside centuries of neutrality to align with EU sanctions requirements.
Alternatively, several nations have not implemented restrictions. Notably, China and India have refused to condemn the conflict or impose economic restrictions on Russia. Whilst the rest of the world has been severing economic ties with Russia, China and India have seen a dynamic increase in Russia related trade. Chinese Imports from Russia surged 56.6% in April compared to last year, and Indian refiners have placed orders for 40 million barrels of Russian oil in the first two months of the war, more than double the figure for all of 2021.
The differing response from nations around the world presents a tough challenge to international organisations that span multiple jurisdictions. Whilst meeting local regulations isn't a new challenge for many, sanctions law often places requirements on their 'citizens' regardless of where in the world they are located and thus can create an environment where individuals and entities must try and comply with a number differing regulations at the same time.
Increased risk of Reputational damage -
The consequences for failing to meet regulatory requirements have never been higher for organisations as public scrutiny rallies alongside financial punishment. Sanctions have never been more in the public eye. For the first time in nearly a century, a war rages in Europe. Images of death and displacement are beamed daily into our homes, and news of alleged human rights abuse and war crimes ripple through social media. Whilst the West has offered military and humanitarian aid to Ukraine, sanctions have been put forward as the solution to grind Russia’s economic ability to conduct military action against Ukraine to a halt.
This has led to an unprecedented scrutiny of both sanctions themselves, and those who fail to comply with regulatory requirements. Even whilst regulation does permit limited operation in Russia, the public scrutiny and perception of relations in Russia has forced an ever-growing number of businesses to remove their services, operations, and products from the country. Some 1000+ companies have already suspended or closed operation in Russia including global powerhouses like McDonalds, Adidas, Ikea, Starbucks, Shell, Netflix, IBM, and Apple.
'Reputational Damage' is a category long used in risk assessments and frameworks around the world for many years. Falling foul of sanctions requirements, and subsequent financial penalties, has undeniably impacted organisations’ reputation in the past. However, the conflict in Ukraine and outpouring of public condemnation means that any organisation failing to meet sanctions may be branded as facilitating Russia’s war against Ukraine and subject to the public defamation that such a title may hold.
Organisations, and the financial crime industry, face unprecedented challenges in the sanctions domain. Failure to meet these challenges will result in significant damages as sanctions have been thrust into the limelight of public perception and political strategy.
In the next blog we will discuss how organisations can best respond to Sanctions screening and operational challenges whilst mitigating the risks in complying with Sanctions and, as new challenges arise, we will continue to develop potential solutions that this community can take, to mitigate the growing regulatory risk of sanctions.
Read our next article “Combatting sanctions evasion” where we discuss the growing trend of sanctions evasion by highlighting key methodologies used, before exploring how such risks can be mitigated.
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