Historically, awareness of sanctions has been mixed in Australia and typically strongest in financial services and commodities. This article examines what sanctions are, who issues them, the core components of a Sanctions Compliance Program, and what the introduction of sanctions on Russia as a result of any future invation of Ukraine might mean for Australian supply chains.
What are sanctions?
According to HM Treasury, “sanctions are restrictions put in place to achieve a specific foreign policy or national security objective. They can (a) limit the provision of certain financial services, or (b) restrict access to financial markets, funds and economic resources”.
Each jurisdiction uses its own terminology for sanctions, but the United Kingdom categorises sanctions into three simple categories:
- Targeted asset freezes – for individuals and entities
- Restrictions on financial markets and services – for individuals, entities, specified groups or entire sectors including:
- Investment bans
- Restrictions on access to capital markets
- Directions to cease banking relationships and activities
- Requirements to notify or seek authorisation prior to certain payments being made or received
- Restrictions on the provision of financial, insurance, brokering or advisory services or other financial activities
- Directions to cease all business – specifying the type of business and applicable to a specific person, group, sector or country
As you can see, sanctions and their impact can by quite broad and far reaching. One particular challenge with sanctions lies in identifying parties who are indirectly sanctioned. This requires more sophisticated due diligence and compliance oversight to manage properly.
Who promulgates sanctions?
The UN Security Council (UNSC) has the power to levy economic and trade sanctions however this requires consensus from the five permanent members of the UNSC, which is rare.
In addition to the UNSC, individual countries have also recognised the strategic power of sanctions, resulting in country specific legislation that impacts companies and individuals resident of, or operating in their jurisdiction that has been enacted since the use of blockades during World War One (Mulder, 2022).
Some national sanctions regimes are politically motivated, such as where foreign dissidents, human rights defenders, or the political opposition are targeted, but this sort of behaviour is typically restricted to non-democratic countries. Globally, major sanctions bodies align with the worlds main financial centres, including:
- United Nations Security Council – with sanctions enforced by each member state
- US Treasury Office of Foreign Assets Control (OFAC)
- HM Treasury Office of Financial Sanctions Implementation (OFSI)
- European Commission Directorate-General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA)
Of these, OFAC is undoubtedly the strongest in terms or reach, influence and enforcement. This is because of the United States’ position as the global financial centre, with most companies having a presence or nexus to that market (including through their bank transactions). OFAC is also an active regulator, levying substantial fines and penalties on companies worldwide. This means that OFAC can be used as the benchmark for any sanctions compliance program – if you satisfy OFAC, you will probably satisfy all other regulators as well.
As it’s global power and influence grows, the People’s Republic of China is increasingly becoming a player in relation to sanctions as highlighted in the Atlantic Council’s Global Sanctions Dashboard. China’s rise and influence in relation to sanctions will be increasingly important.
What should a sanctions compliance program comprise?
In 2019, the U.S. Treasury published its 12-page guidance on designing and implanting a Sanctions Compliance Program in a document entitled “A Framework for OFAC Compliance Commitments”. OFAC expects regulated entities to undertake at least five core elements in their compliance program:
- Management Commitment
- Risk Assessment
- Internal Controls
- Testing and Auditing
- Training
On face value, these elements are much like any other risk or compliance program we would expect to see. However, with sanctions the devil lies in the detail and particularly the complexity of the various regimes. This post is not intended to be a detailed overview of sanctions compliance, rather to provide context for the following discussion on what this means for supply chains.
If your sanctions program is not up to scratch, or if you don’t have one at all, seek specialist advice as the fines and penalties for non-compliance can be substantial and extend beyond the enforcement action to potentially mean your suppliers and customers will no longer do business with you due to the risk you present.
What does the situation in Ukraine mean for supply chain hazards, as an example?
Under Australia’s new Security of Critical Infrastructure (SOCI) Act, one of the key elements of the associated Rules, Supply Chain Hazards, requires regulated entities to ‘establish and maintain in the entity’s program a process or system that the entity uses to minimise or eliminate the material risk of, or mitigate, the relevant impact of” amongst other things “(d) disruptions and sanctions of the asset due to a disruption in the supply chain”.
With the prospect of more sanctions on Russia, companies need to start working now to review their suppliers, update their risk assessments, and identify any potential connections to Russian individuals, entities and sectors. Some of the steps you may need to take include:
- Examining the geographic presence of your suppliers – are any based and / or headquartered in Russia or its allies?
- Ultimate Beneficial ownership or control – who (individuals) or what (other legal entities) one some or all of your suppliers and are any of them Russian, or do they have a nexus to Russia?
- Once you have identified your suppliers and their beneficial owners, be prepared to conduct name screening against the relevant sanctions lists, or alternately use a reliable vendor solution such as Refinitive’s WorldCheck, Dow Jones Watchlist, LexisNexus World Compliance.
- Identify any other potential foreign influence from Russia or its proxies that could impact your supply chain or operations.
If you are new to sanctions, your reaction is probably that this would take a lot of effort and involve some cost. In my experience, this is exactly the case. Once sanctions are promulgated, you need to compare the sanctions list(s) to your supplier data to ensure there are no matches. Your bank will do the same, so if you don’t do this you risk a supplier payment being confiscated by a regulator which can be hard to recover. In addition, intentionally or unintentionally breaking a sanction has serious criminal and civil penalties.
Further Reading
- Atlantic Council (n.d.). Global Sanctions Dashboard, www.atlanticcouncil.org
- Mulder, N. (2022). The Economic Weapon: The Rise of Sanctions As a Tool of Modern War. Yale University Press, New Haven.
- Nicolson, R, and Wilcock, A. (2021). Long-awaited sanctions reform may result in more dispersed sanctions risk, Allens Insights, https://www.allens.com.au/insights-news/insights/2021/12/long-awaited-sanctions-reform-may-result-in-more-dispersed-sanctions-risk/
- Wolos, S. (2016). Know your ultimate beneficial owner or face the consequences, Refinitive Perspectives, https://www.refinitiv.com/perspectives/financial-crime/know-ultimate-beneficial-owner-face-consequences/
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