Exploring Corporate Sanctions Screening in 2022

This article is based on an interview with Dr. Laura Louca, Associate of Public Procurement and International Trade Law at the German-based firm Blomstein. The full podcast and audio recording of this interview can be found here. The following Q&A-style interview with Dr. Louca sheds more light on the topic of sanctions, a subject that is steadily growing in significance for corporates around the world.

Who creates and ultimately imposes modern sanctions? Today, many of the most common sanctions revolve around trade restrictions, such as import and export bans as well as restricting free movement (e.g., visa or travel bans). There are also financial sanctions such as prohibiting the availability of funds or economic resources to certain countries, groups, or individuals, as well as freezing funds and/or disallowing financial assistance related to certain goods or services. In the case of embargoes, they are usually prompted by decisions made through the UN Security Council. For EU member states, the EU legislator implements them in the form of Common Positions (Common Foreign and Security Policy (CFSP) and regulations). The EU can also impose sanctions regardless of UN embargoes. And, of course, embargo measures may exist on a purely national level.

Looking at the national level, there are various sanctions lists that very by country. Are these lists mostly aligned? Yes and no. First of all, it is important to remember that EU nationals and entities as well as persons operating from within the EU are bound by European sanctions. At the same time, other countries like the US, Canada or the UK have their own regulations that are often similar, but not automatically aligned. So, companies that have subsidiaries or business in multiple countries may face the challenge of adhering to different sanction lists that might even contradict each other. Not surprisingly, this can result in significant complexity for enterprise-level multinational firms. For instance, a country or an organization has the right to impose its own sanctions within its jurisdiction which can extend across geographic borders. In practice, however, this is not always the case — consider the EU Blocking Regulation which prohibits entities from obeying secondary sanctions of another jurisdiction if not aligned with EU regulations. At the same time, many companies have business connections to the US, which requires adherence to another similar but separate list of sanctions.

Given the geopolitical situation today and the new restrictions that banks and businesses are facing, how are you and your firm keeping up to date and avoiding mistakes? We have a task force that deals with all sanctions matters. This includes a network of experts and colleagues both within Germany and across other European countries that all have different levels and types of experience. Every regulation is somewhat different; however, you gain experience on how to interpret different sanctions based on the purpose and interpretation of the legislation on previous sanctions. We also talk to authorities like the Ministries or the German Bundesbank for clarification on certain matters, as economic operators often have a very practical approach when interpreting regulations whereas the legislator may see only the ‘letter of the law’.

What happens if a payment is made or promised and then a sanction is imposed? What about the delivery of a good or service? A payment that has been made prior to an actual sanction is, on its own, usually not an issue. It becomes a problem if you owe a good or a service for that payment and now, sanctions have been imposed. The result is a situation with conflicting obligations. The general rule is that sanctions trump contractual obligations.

What about indirect vs direct control? Is that also an issue in relation to Sanctions Screening? Do sanctions apply equally? In theory, only the persons or entities listed in Annex I to the Regulation are directly targeted by sanctions. However, in practice, if the listed person is deemed to own or control a non-listed entity (directly or indirectly), the authorities presume that the control also extends to the assets of that entity and that any funds or economic resources made available to that entity would reach the listed person. This presumption can be rebutted on a case-by-case basis.

How much is ‘enough’ when adhering to sanctions screening mandates? Is there some kind of 80/20 rule? Today, the act of screening is not, per se, a legal requirement. However, doing business with a sanctioned party, whether intentionally or unintentionally, represents a strict liability violation. The only effective way to prevent this from happening is by screening all of your transactions and business dealings, which is why so many treasury and finance departments have adopted screening solutions in order to ensure compliance. For most companies, relying on an external provider for screening makes sense because they have specialized resources and systems for managing this. Banks will also screen their payments very carefully and thoroughly, but once a sanctioned payment has been made by a corporate, banks must take action in the case of violations, which means informing the authorities. Corporates should not rely on their banks to satisfy their own screening requirements in order to prevent actual violations from occurring. There are also limits of proportionality based on the size, structure and scope of the business as well as the business activity and related risks (e.g., product range, customer base and business activity).

What can companies do to better prepare themselves besides working with their legal counsel and their bank or financial services company? Companies should be proactive and inform themselves. They can study the guidelines and the FAQs that the authorities and the Commission regularly publish as well as read /review newsletters either from the regulators or various law firms. Enterprises must also be aware of how their company’s payment process works. This is key so that it can be changed or modified according to regulatory requirements as sanctions and compliance mandates evolve over time.

With a concentration on Russian sanctions today, are companies forgetting / ignoring other key sanctions? What needs to be done to comply? A lot of companies are just beginning to realize that sanctions are something that can influence their day-to-day business and that violations can even lead to criminal or administrative liabilities. Sanctions have become very real and tangible. In order to ensure compliance, it is recommended that companies create a taskforce where knowledge is collected centrally, which saves cost and effort if sanctions impact multiple departments. It is also very important to work on a company’s attitude / mindset to ensure the issue is being proactively addressed. The regulator wants to be certain that sanctions are being taken seriously and everything reasonable is being done.

What are the typical penalties associated with a violation? This can mean a criminal or administrative offence, not only for the employees who manage the transaction, but also for board members and other supervisory personnel. Fines can be very high for companies and if the authorities determine that a person acted intentionally to avoid or circumnavigate sanctions, then the person responsible can be sentenced to prison. Next to the monetary penalties, the authorities can also impound the proceeds of a transaction and a company can lose its status as an Authorized Economic Operator or be excluded from procurement bidding. Of course, financial or criminal charges also impact reputation, so there are a myriad of risks and threats to consider.

What is your advice to a company building up a sanctions screening or due diligence process? Training is key, as is clear and understandable policies and guidelines, especially with regards to the payments’ process. Here are a few further points for consideration:

  • Central Database: Establish a central database to make sure that customer knowledge and information is retained and transparent.
  • Designated Contact: Appoint a contact within the company that employees can turn to if they have questions. Ideally this would be someone in the legal or compliance teams.
  • Screening Automation: Automate your system(s), by adopting 3rd party software, to avoid mistakes when handling large or complex payment volumes.
  • Outsource to the Specialists: Outsourcing is the most effective and efficient move in regard to screening services, because key providers have both expertise and experience with many clients. In addition, this saves a company’s very scarce IT resources for focus in other areas.

Learn More About TIS’ Sanction Screening Capabilities

For more information about the sanctions screening and payment compliance solutions provided by TIS, download our recent whitepaper.