Enforcing Sanctions During a Global Pandemic

As the current humanitarian crisis unfolds, how are governments adapting their sanctions regimes – and how can organisations keep up?

The global COVID-19 pandemic is having a profound impact on every facet of our lives, from curbing our most basic civil liberties to having potentially devastating effects on the economy. The current crisis is also changing government policy, both at home and abroad.

It’s forcing all of us to think more carefully about what’s most important to society. It’s also making firms more vigilant to potential vulnerabilities that could be exploited if the global financial infrastructure is weakened.

So how do sanctions fit into this unprecedented turn of events?

Under normal circumstances, sanctions are used to place limitations on the free movement of goods and funds around the world. However, against the backdrop of the current situation and a crippled global economy, there is a temptation from states to veer towards isolationism; domestic policies are now very much the priority.

In this new context, many are criticising governments that uphold the additional obstacles posed by sanctions, feeling that foreign policy should become a secondary objective in such an emergency.

While sanctions serve to keep criminals at bay, they can also lead to less desirable consequences, such as economic hardship, the concentration of power, misrule by corrupt governments, and conflict within regions isolated from the global economy. A major humanitarian crisis brings these issues to the fore.

If the world’s most sophisticated health services are buckling under the weight of COVID-19, how will countries without access to the global financial system cope? If sanctions are preventing banks and businesses from trading with certain countries and, consequently, cut off from international supply chains, how will aid reach them?

Sanctions regimes must adapt to the current circumstances. Those responsible for implementing sanctions programs – the financial institutions and businesses that are required screen their customers and transactions to ensure they do not facilitate business with a sanctioned entity – must keep pace with the changes and make the necessary adjustments to their data and systems.

The current situation raises three important questions about the sanctions landscape during this pandemic.

1. Do sanctions impede the distribution of humanitarian aid?

There has been much debate on the ethics of upholding sanctions regimes against countries struggling to cope with COVID-19.

In the early weeks of the pandemic, media attention focused on whether the U.S. should lift sanctions on Iran, one of the places hardest hit by COVID-19 and a country that has already been driven into severe economic recession by sanctions. Iranian leadership claimed the country could not gain access to the medical supplies needed to combat the virus. Countries such as Cuba and Venezuela face similar struggles.

The European Union declared “an immediate global ceasefire in light of the global coronavirus pandemic” on 3rd April. The statement, issued by the High Representative Josep Borrell, stressed that, “sanctions should not impede the delivery of essential equipment and supplies necessary to fight the coronavirus and limit its spread worldwide.”

The Office of Foreign Assets Control (OFAC) on the other hand, has maintained that its existing exemptions are sufficient for humanitarian assistance to be provided to sanctioned jurisdictions. The organisation did however provide clarification on its exemption guidelines on 16th April. Its new fact sheet highlighted “the most relevant exemptions, exceptions, and authorizations for humanitarian assistance and trade under the Iran, Venezuela, North Korea, Syria, Cuba, and Ukraine/Russia-related sanctions programs.”

At the same time, OFAC has made it clear it is paying close attention to whether such humanitarian activities are being exploited for either fraud or corruption.

Government policy and regulatory guidelines form just one side of the coin. It is also necessary to consider how such exemptions are implemented and if they can be effective in enabling resources to reach those most in need.

2. How are exceptions and exemptions to sanctions programs implemented?

There have always been exceptions to sanctions programmes. For example, sanctions are increasingly targeted – designed to reduce sources of funding for specific entities and impede their malign activities. Even the most comprehensive sanctions regimes typically include exceptions to allow for humanitarian aid to reach those who need it.

Andrea Gacki, director of OFAC, commented on a recent online panel that provisions were already in place to allow the United States to supply items of PPE to Iran, so new exemptions were not necessary.

However, a further consideration is whether such governments are willing, and indeed able, to export humanitarian aid during a crisis which is undoubtedly challenging every country’s resources. The United States has implemented new export controls that require any export of Personal Protective Equipment (PPE) to be authorised by the Federal Emergency Management Agency (FEMA), which could create an additional hurdle.

Gacki confirmed that OFAC is “not seeing a ton of requests to export PPE – I think, in large part, because of the needs of the United States.”

Whether new or existing, exceptions and exemptions can be challenging to put into practice because their implementation relies on the in-depth analysis of every transaction by financial institutions and other organisations in the supply chain as part of their risk remediation process – and depends somewhat on the risk appetite of those businesses.

During a recent webinar that Accuity co-hosted with the Association of Certified Financial Crime Specialists (ACFCS), we polled the predominantly North American and European audience to understand how challenging it is for firms to implement new guidelines.

Of the 334 compliance personnel who answered the question, “Has OFAC guidance on exceptions for humanitarian assistance been sufficient to process these transactions?” a staggeringly low three percent felt the guidance was “sufficient,” with no operational concerns. Significantly, 22% of the audience felt they needed “more guidance and clarifications from regulators.”

Source: audience poll from ‘Sanctions Compliance in a State of Flux – Trends and Guidance Amid Global Upheaval’ webinar hosted by the ACFCS and Accuity. Poll answered by 334 attendees.

There are so many complex and overlapping rules that create uncertainty for firms, leading many to avoid doing business in entire regions. Even if some of those rules are relaxed to allow for humanitarian aid to get through, many organisations may feel they cannot risk getting it wrong.

This is because banks and businesses pay a high price for due diligence. Even to trade permitted items like food is often considered operationally dangerous and may attract an increased level of scrutiny from regulators.

John Smith, a former OFAC director, commented recently that “the politics are impacting the actual transmission of the humanitarian equipment because people are scared,” adding the situation is “lose-lose” for banks.

However, if organisations can have confidence in their sanctions controls, it may change their approach to the risk. In a recent Q&A with lawyer and sanctions expert Nicholas Turner, he commented that, “there are numerous humanitarian general licenses available under OFAC regulations to support COVID-19 relief efforts.”

He added, “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.”

To take advantage of the exceptions and exemptions to the usual sanctions programs, banks and businesses must ensure they have access to up to date sanctions data and sophisticated filtering technology to ensure every transaction is screened properly and those that are allowed to go through are able to be processed efficiently and effectively. If they can do this, they can join the international effort to ensure the right resources reach those who need them most.

3. Has the pandemic created operational challenges for organisations conducting sanctions screening?

The COVID-19 pandemic has created a plethora of operational challenges for businesses, and sanctions screening is no exception.

One of the most significant measures governments have taken to curb the spread of COVID-19 is social distancing. Employees around the world are adapting to working from home where possible, and firms have had to activate their business continuity plans to keep business running as best they can without staff physically present in the workplace.

In the same Accuity and ACFCS webinar, we polled the audience to try to quantify the operational impact of COVID-19 on firms’ financial crime screening teams. One quarter of the 259 compliance personnel who answered the question, “How has the pandemic impacted your sanctions compliance operations?” agreed that they have had “IT and technology challenges”, while 18% confirmed they were “short on staffing in the transition to work-from home”.

Source: audience poll from ‘Sanctions Compliance in a State of Flux – Trends and Guidance Amid Global Upheaval’ webinar hosted by the ACFCS and Accuity. Poll answered by 259 attendees.

For banks particularly, switching to a remote working set-up poses many logistical and security challenges, and a more sudden jolt towards digitisation than might otherwise have been comfortable.

With staff working remotely or absent due to sickness, switching to ‘emergency mode’ has had a knock-on effect on the efficiency of processing transactions, managing screening systems and lists, and allocating resources to those tasks.

Those firms that have already transitioned towards cloud-based and automated KYC and AML technology – as well as new, nimble players like fintechs and start-ups – have seen a great advantage.

The full effects of COVID-19 remain to be seen across the sanctions landscape. Follow the Accuity Sanctions Pulse to keep up to date with the latest global trends