Change agent: The case for sanctions

In Tunisia, Egypt, Libya, across the
Middle East and North Africa a “wave of revolutions” raises cries for freedom
and democracy. In their wake, the global community sweeps in sanctions to
support citizens and help suppress oppressive regimes. Will they work? Will
they impact your organisation?

December 2010, a fruit seller in Tunisia
had his scale stolen yet again by police. Weary of the abuse and the bribes
demanded by corrupt officials, he set himself on fire. This fire has now spread
across North Africa and the Middle East. The world watched in awe as thousands
rose up to confront the leaders of oppressive regimes. Switzerland, the United
Nations, the USA and several other countries imposed sanctions to help support
those driving change. The Arab League appealed to the UN for a “no-fly zone”
over Libya and froze Libya’s membership. The world is experiencing “a wave of
great revolutions that would change the course of history” said Alain Juppé
before the UN voted in favour of the “no fly-zone” sanction, 17 March 2011. But
exactly what are sanctions, how do they work and what must organisations do to
ensure compliance? 


What are sanctions?

Sanctions are enforcement measures taken
by a country or group of countries to maintain or restore peace and security.
These sanctions are intended to apply pressure on a country, person or
organisation to comply with international law or codes of conduct without
resorting to the use of force. They can take the form of political, economic or
military measures such as limiting diplomatic contact, prohibiting travel,
freezing assets and restricting weapons. 

The UNSC, established in 1946, is
charged with the maintenance of international peace and security. The Council’s
powers include the establishment of peacekeeping operations, the establishment
of international sanctions, and the authorisation of military action. Its
powers are exercised through resolutions. There are 15 members of the Security
Council, consisting of five veto-wielding permanent members (China, France,
Russia, the United Kingdom and the United States) and 10 elected non-permanent
members with two-year terms. Resolutions by the Security Council are legally binding
for all 192 member countries, if they are made under Chapter VII (Action with
Respect to Threats to the Peace, Breaches of the Peace, and Acts of Aggression)
of the Charter.

The European Union may also issue
sanctions to be adopted by its 27 members. UN and EU member nations adopt these
sanctions and may even extend their scope to include additional entities or
restrictive measures to protect their national security. For instance, the
Office of Foreign Assets Control of the US Department of the Treasury enforces
sanctions against countries and regimes, terrorists and other entities that
pose threats to the USA.

Many of the sanctions are based on international
mandates such those issued by the UN. OFAC, established in 1940, played an
important role in World War II by introducing sanctions against German
businesses and ensuring that German companies could not use the resources of
occupied countries in transactions with Americans. Today, OFAC requires
American individuals doing business with foreign entities to ensure that their
partners are not on OFAC’s list of sanctioned countries or organisations. The
OFAC Specially Designated Nationals list includes the names of individuals and
organisations identified by various sanctions programs including those with
ties to terrorist groups, arms trading and narcotics trafficking networks.
Violating the sanction may result in fines from $50,000 to $10 million and up
to 30 years imprisonment.

How do they work? 

“Apply economic sanctions peacefully,
silently and effectively, and there will be no need for war.”
Woodrow Wilson, 1919

In principle, sanctions are a peaceful
alternative to war. Because of their potential impact, sanctions are a measure
of last resort. Multilateral, comprehensive, economic sanctions can significantly
impede a country’s ability to govern and to provide for its civilians as many
countries in today’s global economy depend on international trade. In the past,
comprehensive sanctions against entire countries have been criticised for
impacting those most vulnerable, the young and the poor.

In 1998, former UN
Humanitarian Coordinator in Iraq Denis Halliday estimated that “two
hundred thirty-nine thousand children five years old and under” had died
due the sanctions against Iraq. In 2001, in an effort to prevent the unintended
consequences of sanctions on innocent civilians, the Swiss, in cooperation with
the UN, released a report outlining “instruments of targeted financial
sanctions”. This approach targets sanctions at specific individuals and organisations
versus entire countries.  

Unlike the 1990 Iraq sanctions, the 2011
UNSC Libyan resolutions are not comprehensive economic sanctions. Instead, the
sanctions specify over thirty entities to which a travel ban or asset freeze
applies. These include Muammar Qadhafi, his sons and individuals and companies
supportive of his regime including the Central Bank of Libya. To date, the USA
has frozen over $30 billion in assets controlled by Qadhafi and his family, the
single largest seizure of foreign funds in American history. Switzerland has
similarly frozen the assets of Qadhafi, Mubarak and Ben Ali.

Are they effective?

Governments, organisations, including
the UN itself, and academics around the globe provide arguments for both sides
of the debate. Evidence suggests sanctions influenced positive changes in South
Africa and Rhodesia. Evidence also suggests sanctions in North Korea and Iraq
have not yielded positive results but have increased the isolation and poverty
of innocent civilians.  

Several countries including Australia,
Canada, the US and the EU have sanctions against Burma/Myanmar due to human
rights violations. While some of the sanctions have been in place for many
years, the military junta remains in power and the citizens remain in poverty.
“The great majority of Burmese, who are working in agriculture, are not
affected at all,” said Aung San Suu Kyi, leader of Burma’s opposition, of
sanctions in a recent interview. Suu Kyi continues to support sanctions against
Burma despite being freed in 2010 after seven years of house arrest. Similarly,
in recent months hundreds of Libyans living abroad have joined rallies around
the world in support of sanctions against Libya.

Despite their flaws, one simple but
significant value of sanctions remains. It is the principle of the sanction
itself. It identifies an abhorrent act and creates a vehicle by which the
global community can stand against it. It stands with those fighting, those
victimized and oppressed and in acknowledging their struggle, fuels moral support.
In a recent interview with PBS, Mikheil Saakashvili, President of Georgia,
speaking from his personal experience during the conflict between Russia and
Georgia stated, “When we talk about people who are trying, fighting for their
survival, … never underestimate. People talk a lot about arms and bombing, et
cetera. Never underestimate the power of moral support.” 

How do sanctions impact my organisation?

Sanctions impact many organisations and
professionals beyond the banking sector. Securities, insurance and money
services firms, shipping companies, importers/exporters, casinos, and
professionals such as lawyers and accountants must all be aware of sanctions
that may impact their organisations. In fact, all citizens must comply with
their jurisdictional sanctions. In the case of OFAC regulations, all US
citizens and permanent resident aliens regardless of where they are located,
all persons and entities within the United States, all US-incorporated entities
and their foreign branches must comply. In the cases of certain programmes,
such as those regarding Cuba and North Korea, all foreign subsidiaries owned or
controlled by US companies must also comply. Certain programmes also require
foreign persons in possession of US origin goods to comply.

Violating sanctions lists can result in
business closures, significant fines and reputational damage. In recent years
the enforcement of sanctions lists has increased, as have the penalties: 

  • August 2010, the US Justice Department
    fined Barclays Bank $298 million for dealings that violated US sanctions with
    Cuba, Burma, Iran and Sudan between 2002 and 2007. 
  • June 2010, the United Arab Emirates
    closed down 40 international and local firms as part of a crackdown on
    companies that violate UN sanctions on Iran.  
  • January 2009, Lloyds paid the US
    authorities $350 million for helping clients avoid sanctions against Iran,
    Sudan and Libya between 1995 and 2007. 
  • December 2009, Credit Suisse agreed to
    pay a record $536 million fine for violating US sanctions by hiding clients’
    identities in order to move millions on their behalf. 

In order to mitigate the risk of fines
and reputational damage, organisations must ensure they are aware of sanctions
that apply to their jurisdictions. They must also stay abreast of any changes
to these sanctions by continuously monitoring the relevant sources. 

How do I ensure my organisation is

An organisation is responsible for
ensuring that the individuals, organisations and countries they do business
with do not appear on sanctions list applicable to their jurisdiction. This
includes screening new clients and monitoring transactions of existing clients. 

Sanctions lists can include thousands
and thousands of names in multiple languages, many having multiple aliases. For
instance, the current Canadian OSFI lists, EU Financial Sanctions Consolidated
List, the UK HM Treasury Financial Sanctions List, the US OFAC SDN List and the
UNSC sanctions lists all contain over 2000 entities each with some well over
4000. Furthermore, the UNSC alone currently has sanctions against a dozen
countries. Monitoring these and other sanctions can present a formidable
challenge. Fortunately, solutions are available to help organisations manage
this challenge. Here are some important criteria to consider when evaluating
the various solutions currently available:

Comprehensive intelligence: In order to
meet compliance requirements related to sanctions, Know Your Customer,
Anti-money Laundering and Politically Exposed Persons, an organisation requires
a comprehensive range of Open Source Intelligence. Ensure solutions assess the
tens of thousands of names currently listed in global sanctions and
watch-lists, the hundreds of thousands of names on international, federal,
state and municipal enforcement lists from police, judicial and regulatory

Look for solutions that provide integrated news media, trade journals
and industry publications that have been automatically and intelligently
screened for information relevant to compliance. Select a solution with a large,
broad base of profiles, important for PEP and KYC analysis. Country risk
profiles that can be readily accessed as part of the due diligence process are
another important feature that can help mitigate risk.

Real time, accurate information:
Sanctions and enforcement list change continuously so having the right
information as soon as it is available is critical in compliance. Systems that
load information automatically versus having it entered manually eliminate data
entry errors and delays. Solutions that continuously monitor Open Source
Intelligence sources and immediately update any changes ensure organisations
are working with the most current information when assessing a potential
business transaction. 

Intelligent name matching: Sanction and
enforcements lists contain hundreds of thousands of names. These names can
often have multiple aliases, and due to transliteration, multiple spellings.
For instance, the current OFAC SDN list includes twelve different variations of
Muammar Qadhafi. To ensure a query is exhaustive, yet eliminates false
positives, look for a solution that uses the latest computational linguistics
technology. Many solutions leverage simple phonetic approaches that have
limited capability to process non-Latin scripts such as Arabic, Asian and
Cyrillic names. Algorithms combining transliteration, phonetics and
alphabet-aware mappings provide more accurate results and far fewer false

Streamlined workflow and reporting: Look
for solutions that enable users to review name matches and permanently store
their analysis and screening activity. This feature not only enhances the
review process but also provides a verifiable, auditable trail that is now
required by more and more auditors. Some solutions will also automatically scan
a customer’s database against the latest changes to sanctions and enforcement
lists and provide users with a list of potential matches. 

In the last few months many countries
such as Canada, the US and the UAE have recommended companies be “very
vigilant” and exercise “enhanced due diligence” on all transactions involving
sanctioned countries and entities. Due diligence must remain vigorous as
activity related to these sanctions and others will only continue over the next
several months and beyond as entities try to transfer or liquidate global

Organisations cannot afford to be caught
unaware of sanctions and their business impact. As the complexity and frequency
of targeted sanctions increase so does the prevalence and severity of penalties
by governments and enforcement agencies worldwide. Faced with mounting
compliance challenges businesses and professionals must invest in strategies,
systems and staff to meet the global sanctions and compliance requirements or
risk reputational damage, severe fines and criminal charges.