As part of our ‘Ask the Expert’ series, we ask Nicholas Turner, Of Counsel with Steptoe & Johnson in Hong Kong and author of the weekly Sanctions Top-5 blog, about the trends he’s seeing across the global sanctions landscape.
Over the last year, the United States has continued to strengthen its sanctions against Cuba, Iran, and Venezuela, and is increasingly targeting their major trading partners. The number of Chinese companies under investigation or subject to sanctions designations has jumped considerably. At the same time, OFAC has emphasized the importance of compliance. In the past, OFAC didn’t give much compliance advice—it left it up to companies to figure out how to follow the rules. In May 2019, OFAC issued “A Framework for OFAC Compliance Commitments,” and is being increasingly vocal about how companies should comply. This year, we are seeing a huge emphasis on the impact of sanctions on humanitarian trade. Obviously, this issue has been around for a long time. But the COVID-19 pandemic has sharpened the international community’s focus on the human costs of sanctions, especially in Iran and Venezuela. It’s a hard needle to thread.
Last year saw a huge increase in sanctions as well as a record level of OFAC enforcement action. What do you think was behind this increase?
Without enforcement, sanctions don’t bite. OFAC, in particular, uses enforcement actions to send messages about its expectations for compliance. Many recent cases have included statements from OFAC on why it is bringing a violation to the public’s attention. While there have been a few large settlements, including some in excess of a billion US dollars, many recent OFAC monetary penalties have been relatively small, albeit accompanied by an important compliance lesson.
Which countries or issues are most impacted by sanctions?
Obviously, territories that are targeted directly by comprehensive sanctions (i.e., Crimea, Cuba, Iran, North Korea, Syria) or whose governments are targeted (e.g., Venezuela) are the most impacted. However, in practical terms, it is often neighboring countries or trading hubs that bear the brunt of enforcement—China, Hong Kong, Singapore, Turkey, the UAE, and so on. In terms of issues, the United States is increasingly focused on using sanctions and export controls vis-à-vis China, especially in the technology sector. Globally, there is a new focus on using financial sanctions to target corruption and human rights abuses through Magnitsky-style sanctions. This is one area where many governments still agree.
How effective are sanctions are as a diplomatic tool and how does this vary in terms of unilateral sanctions (eg. U.S.) versus multilateral sanctions (eg. UN)?
I have yet to see research that convincingly shows that sanctions are effective at achieving their stated outcomes (trust me, I’ve looked.) However, sanctions do provide a framework for diplomacy as long as the sanctioning party is willing to provide relief in exchange for a change in behavior. The Joint Comprehensive Plan of Action is one example. In the UN context, the fact that the Security Council manages to achieve enough consensus to adopt sanctions is evidence of a diplomatic accomplishment, considering the veto power of the permanent members which include the United States, China, and Russia.
What new ways are bad actors using to evade sanctions?
Most law enforcement sources seem to agree that cryptocurrency is the new frontier in sanctions evasion. However, the extent to which cryptocurrencies can replace traditional currencies appears to be limited so far. The industry is also increasingly regulated and, theoretically, less vulnerable to abuse. When it comes to intentional evasion of sanctions and banks’ compliance controls, I think the lion’s share is still happening through traditional networks involving front companies and professional money movers who understand the international financial system as well as anyone.
How effective have financial services firms been in complying with these new rules? Are sectors outside of financial services complying effectively?
Trade has to be financed somehow, and this means that banks are exposed to their own risks as well as risks brought in by their customers, including correspondent banks. Given the value and volume of transactions, it is no wonder that some of the largest sanctions settlements have involved financial institutions. This has caused many financial services firms to put significant resources into complying with sanctions rules. By and large, I think they are effective, in the sense that they are screening payments and avoiding obvious violations. That said, trade finance understandably continues to be a challenge for many banks. Outside of financial services, OFAC has been increasingly focused on enforcement against corporates—many non-financial companies are just starting their compliance journeys, and it is still common to find ones without any sanctions policy at all. That is quickly changing.
What resources are especially important in ensuring sanctions compliance?
Information and technology. Companies with hundreds, thousands, or millions of customers and transactions have no choice but to use technology to comply with sanctions. But designing the program and making decisions takes a lot of know-how, training, and, in some cases, specialist advice.
How is technology helping to ease the compliance burden for companies?
Sanctions compliance and technology go hand-in-hand. But we all know that companies are dealing with a mountain of name screening alerts. Over the past few years, the number of providers offering artificial intelligence, machine learning, and other enhancements is growing. That’s good for two reasons. First, it improves operational efficiency and saves costs. Second, it opens the door to new ways of monitoring for sanctions evasion that go beyond basic name screening.
The United Kingdom has more latitude after Brexit to set its own sanctions policy. Where could we see this divergence in action?
It’s anyone’s guess how UK sanctions policy will develop. But one thing is clear: the UK Office of Financial Sanctions Implementation is gaining in influence. OFSI’s recent enforcement action against Standard Chartered, which involved some pretty complicated facts, and a big fine, is just the start.
What’s your view on the potential impacts of the COVID-19 crisis for sanctions compliance and financial crime?
Overall, I think the pandemic is bringing our focus back to the impact of sanctions on everyday people. Sanctions are meant to have an economic impact. That’s undeniable. And I think it’s hard to deny that sanctions are exacerbating public health crises in some places. Some people argue this means the sanctions should be eased. Others argue it’s up to the sanctioned governments to concede in order to protect their own people. This is the position apparently taken by the US government and EU on Venezuela. In any event, there are numerous humanitarian general licenses available under OFAC regulations to support COVID-19 relief efforts. My sense is that banks will be more willing to rely on them for payments related to exports of medical goods and services than they were before the pandemic.
When borders are shut but goods still need to be traded, how can this be done safely?
It looks like the global economic fallout from the pandemic could be huge. Companies may be forced to rethink their supply chains, shipping routes, carriers, and so on. Due diligence is going to be key to managing sanctions risks in that process, and some companies may have to do it with fewer resources than before. Now is the time to put in place the right technology and procedures.
About Nicholas Turner, Of Counsel with Steptoe & Johnson:
Nicholas Turner is a lawyer with Steptoe & Johnson in Hong Kong. He works with multinationals designing and implementing compliance programs covering all aspects of economic sanctions and anti-money laundering. Nicholas also delivers tailored training for clients, is a frequent speaker at conferences and workshops throughout Asia and is a Certified Anti-Money Laundering Specialist (CAMS).