Deloitte’s sanctions digest

The events that have taken place over the course of 2022 have changed the way sanctions regimes are being implemented globally.

Deloitte has designed a series of blogs to offer insight into the evolving global sanctions landscape, and provide some practical steps to help organisations adapt and ensure continuing compliance with regulatory obligations. Across the series we will explore:

• 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.

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 programme, to comply with these new regimes on an ongoing basis.

Geo-political influence: 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 by Russia in 2014 targeted sanctions were implemented by the West nations in those occupied areas. Fast forward to 2022 and as Russia invaded Ukraine, 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.

Rapid implementation: Traditionally, the implementation of sanctions was a ponderous process that involved rounds of diplomacy and research before any measures were imposed. The invasion of 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 nation states acted decisively.

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 legal requirement to apply any restrictions on Russia. Instead, the decision and responsibility to apply any measures fell 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, some of which have seen a dynamic increase in Russia related trade. For example, Chinese imports from Russia surged 56.6% in April compared to last year and Indian refiners placed orders for 40 million barrels of Russian oil in the first two months of the conflict, more than double the figure for all of 2021.

Looking further ahead, the geo-political rift created by the Russia-Ukraine conflict may lead to further autonomous measures – not just targeted on Russia. Following increased missile testing activity, China and Russia vetoed a US effort to tighten UN sanctions on North Korea. This was the first split among the five veto-wielding permanent members of the UN Security Council since it began sanctioning Pyongyang in 2006. The US raised resolution called for restrictions on tobacco and oil imports and was supported by the other 13 council members. Following the veto, several G7 nations have said they will implement autonomous sanctions – again taking the responsibility of sanctions into their own hands.

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 of 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, with daily news and images of human displacement and suffering. Whilst the West has offered military and humanitarian aid to Ukraine, sanctions have been put forward as the solution to reduce Russia’s economic ability to conduct military action against Ukraine.

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 800+ companies have suspended or closed operation in Russia following the invasion, 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. Falling foul of sanctions requirements, and subsequent financial penalties, has undeniably impacted organisations’ reputations in the past. However, the outpouring of public condemnation of the Russia-Ukraine conflict means that any organisation failing to meet sanctions may be branded as facilitating Russia’s invasion of Ukraine and subject to the public defamation that such a title may hold.

Conclusion

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. As new challenges arise, we will continue to develop potential solutions that this community can take, to mitigate the growing regulatory risk of sanctions.