CSS Exam Preparation Manual PDF

Certified Sanctions Specialist (CSS) 1 Certified Sanctions Specialist (CSS) Exam Preparation Guide May 2020 Version 11 Association of Certified Sanctions Specialists (ACSS) 7950 NW 53rd Street Suite 337 Miami, FL 33166 Phone: +1 305 433 7187 [email protected] www.sanctionsassociation.org www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 2 Copyright © 2020 by Association of Certified Sanctions Specialists (ACSS) All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the publisher, except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law. For permission requests, write to the publisher at [email protected]. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 3 Table of Contents INTRODUCTION.................................................................................................................9 About ACSS......................................................................................................................... 11 SANCTIONS REGIME TYPES, GOALS, PROHIBITIONS AND EFFECTS 17 Sanctions: Definitions and Objectives..................................................................... 18 The History of Sanctions................................................................................................ 19 Sanctions Regimes............................................................................................................ 20 Common Types of Sanctions........................................................................................ 22 Exceptions to Sanctions................................................................................................. 27 Effectiveness and Unintended Consequences..................................................... 29 Summary............................................................................................................................... 33 Review Questions............................................................................................................. 34 SANCTIONS IMPOSERS AND TARGETS............................................................. 37 Introduction........................................................................................................................ 38 United Nations................................................................................................................... 38 European Union................................................................................................................. 43 United Kingdom................................................................................................................. 59 United States...................................................................................................................... 64 Russia.................................................................................................................................. 104 Other Players in the International Arena............................................................ 104 Summary............................................................................................................................ 109 Review Questions.......................................................................................................... 109 SANCTIONS EVASION: TYPOLOGIES AND SCHEMES............................ 111 Introduction..................................................................................................................... 112 Sanctions Evasion in the Financial Sector........................................................... 115 Sanction Evasion in the Trade Sector.................................................................... 122 Case Study: North Korea............................................................................................ 125 Summary............................................................................................................................ 128 Review Questions.......................................................................................................... 129 www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 4 ESSENTIAL COMPONENTS OF RISK-BASED SANCTIONS COMPLIANCE PROGRAMS IN DIFFERENT INDUSTRY SETTINGS.... 131 Sanctions Compliance Programs: An Introduction......................................... 132 The Essential Components of a Sanctions Compliance System................. 132 Management Commitment....................................................................................... 144 Sanctions Risk Assessment........................................................................................ 146 Organizational Structure and Internal Controls.............................................. 149 Testing and Audit........................................................................................................... 156 Training.............................................................................................................................. 157 Customer Due Diligence............................................................................................. 159 Considerations for Specific Industries.................................................................. 161 Commercial (re) insurance......................................................................................... 173 Exporters and importers............................................................................................. 185 Summary............................................................................................................................ 189 Review Questions.......................................................................................................... 189 ROLE OF TECHNOLOGY AND LIST SCREENING......................................... 191 Sanctions Screening: An Introduction................................................................... 192 The Screening Process................................................................................................. 193 Lists and List Management........................................................................................ 195 What to Screen?............................................................................................................. 196 Technical Issues.............................................................................................................. 199 Summary............................................................................................................................ 210 Review Questions.......................................................................................................... 210 OPERATIONAL ISSUES CONTRIBUTING TO AN EFFECTIVE AND EFFICIENT SANCTIONS COMPLIANCE PROGRAM.................................. 211 Operational Issues: Introduction............................................................................ 212 Resolving Cases.............................................................................................................. 212 Licenses.............................................................................................................................. 213 Blocking or Freezing..................................................................................................... 217 Rejecting Transactions................................................................................................ 219 Record Keeping and Reporting................................................................................ 220 www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 5 Contractual Clauses and Warranties.................................................................... 222 Interaction with Other Compliance Areas.......................................................... 223 The Business Environment and Sanctions........................................................... 231 Summary............................................................................................................................ 232 Review Questions.......................................................................................................... 233 ENFORCEMENT AND (INTERNAL) INVESTIGATIONS............................. 235 Enforcement and Internal Investigations: Introduction................................ 236 Enforcement Agencies................................................................................................. 236 The Investigative Process........................................................................................... 245 Penalties............................................................................................................................ 247 Internal Investigations and Voluntary Self-Disclosure.................................. 253 Summary............................................................................................................................ 255 Review Questions.......................................................................................................... 256 REFERENCE MATERIAL AND READING LIST............................................... 257 GLOSSARY OF SANCTIONS TERMS................................................................... 261 PRACTICE QUESTIONS............................................................................................. 293 Practice Questions for the CSS Examination..................................................... 294 Answers:............................................................................................................................ 296 www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 6 Contributions ACSS wishes to thank those who contributed to the development of the CSS and this Study Guide. Study Guide Contributing Author: Scott Nance, Langley Compliance Consulting LLC Editor: Saskia Rietbroek, CSS, Executive Director, Association of Certified Sanctions Specialists (ACSS) www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 7 Certified Sanctions Specialist (CSS) – Certification Task Force The following ACSS members participated in the different phases of the CSS exam development process, including the Job Analysis, Item Writing and Cut Score Workshops. ACSS thanks them for their support! FIRST LAST JOB TITLE ORGANIZATION Senior Officer, Anti The National Commercial Ahmed Abul-Ola Money Laundering Bank BSA/AML Compliance Alecia Alison Home Credit U.S. Officer Sr. Managing Consultant Theone Alleyne Risk & Compliance IBM Practice Ramanuj Basu Senior Manager Clearbanc Senior Managing Director, Global Practice Matt Bell Co-Leader Export FTI Consulting Controls and Sanctions Practice Stefano Boezio Consultant Oliver Wyman Assistant General Ann Broeker Moody’s Corporation Counsel Senior Expert Compliance Raiffeisen Bank Tatjana Dobrovolny Programs and Systems International AG Solutions Global Legal-Ethics & Josue Garcia Corporate Compliance, Carnival Sr. Manager Güldner- Raiffeisenbank Thorsten Sanctions Bervoets International Tyler Hand Chief Compliance Officer Western Union Sr. AML & Trade Control Analyst Glenda Juliano Franklin Templeton International Global Risk Control Heidi Kinkartz Director, Global Sanctions Scotiabank Head, Global Sanctions Leslie Kuester Western Union Strategy www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 8 FIRST LAST JOB TITLE ORGANIZATION Trade Center of Excellence - Sanctions Marsha Mitts Manager Caterpillar Inc Law Security & Public Policy Vice President, Global Max Lerner Head Sanctions State Street Corporation Compliance Langley Compliance Scott Nance Attorney Consulting LLC Alina Nedea EU Commission VP & Group General Ben Omorogbe Travelers Insurance Counsel | Legal Francisco Rapp Chief Sanctions Officer Citi Eric Rudolph Director FTI Consulting Global Head - Regulatory Simon Ring Polestar Technologies AML Sanctions Director Senior Vice President Jacqueline Santos PNC Enterprise AML/BSA and Sanctions Philip Schell United Nations Senior Compliance Hera Smith Officer, Sanctions and Danske Bank Embargo Managing Director, Head Clay Stevenson of Sanctions & Deutsche Bank Embargoes, Americas Samantha Sultoon Atlantic Council Director, Corporate Arlene Swanson Compliance Nationwide Sanctions Compliance Chief International Trade Inna Tsimermann Gallagher Counsel Managing Director, Amber Vitale Forensics & Litigation FTI Consulting Consulting Sr. Sanctions Manager | Peter Weiss BMO Enterprise AML Green River Hollow Robert Werner Founder and CEO Consulting www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 9 INTRODUCTION Association of Certified Sanctions Specialists (ACSS) 7950 NW 53rd Street Suite 337 Miami, FL 33166 Phone: +1 305 433 7187 [email protected] www.sanctionsassociation.org www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 10 INTRODUCTION How to Use this ACSS Examination Preparation Guide This study guide is designed to be a companion to the “CSS Exam Preparation Virtual Classes” and a comprehensive self-paced exam preparation tool. The guide is divided into eleven primary sections to better facilitate the study process: I. Introduction II. Sanctions Regime Types, Goals, Prohibitions and Effects III. Sanctions Imposers and Targets IV. Sanctions Evasion: Typologies and Schemes V. Essential Components of a Risk-Based Sanctions Compliance Program in Different Industry Settings VI. Role of Technology and List Screening VII. Other Operational Issues VIII. Enforcement and Conducting/Supporting Investigations into Sanctions Violations IX. Reference Material and Reading List X. Glossary XI. Practice Questions The CSS study guide uses icons to emphasize key points, definitions and information, to point out case studies and examples and to direct the reader to the reference section for additional information. The lightbulb can be found next to key points and definitions The scale and gavel indicates a case study or scenario example The books direct the reader to the reference section for more information This study guide was designed to assist candidates in preparing for the CSS Certification Examination. It includes an overview of the test development process, test taking techniques and reference materials for topics included in the content outline for the examination. This study guide is not meant to address all possible conditions or questions, nor does it represent a comprehensive preparation for the examination. The editors of this examination study guide and ACSS do not have knowledge of specific examination questions. While this guide www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 11 is intended to assist candidates in preparing for the examination, they are expected to prepare for the examination through self-study. About ACSS The Association of Certified Sanctions Specialists (ACSS) is a professional membership body for sanctions professionals worldwide. It was formed to advance sanctions compliance by supporting the professional development of the individuals who lead those efforts. The goal of ACSS is to: Serve the professional interests of its members by delivering high quality services and promoting the interests of the profession Provide professional qualifications and set standards for sanctions practitioners Be an authoritative and respected voice promoting sanctions compliance Enhance the careers of sanctions professionals worldwide See http://www.sanctionsassociation.org Advisory Board Guided by an Advisory Board of distinguished experts, ACSS is dedicated to providing its members top quality education, career development programs, and other membership benefits – including information exchange and peer networking – to help in advancing their skills. Through professional certification and qualifications, ACSS members stand out as leaders in the field. ACSS Advisory Board Members: Clay Stevenson Pinar Gungoren Chedru Advisory Board Chair Global Head of Embargoes and Sanctions Founder Compliance CHS Sanctions Advisory Societe Generale Matt Bell Heidi Kinkartz B.A., LL.B., CAMS Senior Managing Director Director Global Sanctions FTI Consulting Scotiabank Ms. (Dipl. Ing.) Tatjana Dobrovolny Francisco Rapp Senior Expert Compliance Programs and Systems Chief Compliance Officer, Sanctions and Anti- Solutions Bribery Raiffeisen Bank International Group Citi Brian Grant Robert Walsh Global Head of Sanctions Compliance Deputy Chief Compliance Officer and Global Mitsubishi UFJ Financial Group (MUFG) Financial Crime Officer AXA Group www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 12 Karen Robertson Robert Werner Global Trade Compliance Officer Founder Uber Technologies, Inc. GRH Consulting Jacqueline Santos Senior Vice President Enterprise Compliance Bank Secrecy/Anti-Money Laundering and Sanctions PNC Bank Todd Willis Global Trade Advisor Caterpillar, Inc. ACSS Member Resources and Training What are the core benefits of joining the Association of Certified Sanctions Specialists (ACSS)? As an ACSS Member, you will gain access to: CSS Certification Exam, which allows sanctions professionals the opportunity to earn credentials as a Certified Sanctions Specialist, or CSS. The credential will provide ACSS members with a powerful career advantage and their employers and clients the comfort of knowing that he or she has met high standards of knowledge and training. The CSS credential will test members’ skills in sanctions compliance, export control duties, listing matching, consulting, investigating, and more! Education and Online Certificate Programs, which provide sanctions professionals to gain expertise in important sanctions topics., such as OFAC Essentials, EU Restrictive Measures and Anti-Bribery Essentials. Live and On-demand Webinars, which include 25+ LIVE webinars per year, where attendees can ask real-time questions during expert-led sessions and even earn CE/CLE credits. ACSS Members also have the unique opportunity to browse our archive of on-demand webinars by logging into our online Learning Management System (LMS). Interactive Sanctions Map, an interactive tool with an overview of sanctions in place against countries around the world. The Map focuses on sanctions imposed by the U.S. (OFAC), E.U., U.K., U.N., and Canada. Find out what specific sanctions are in place against a country by simply clicking on that particular country! Sanctions Enforcement Actions Database, where you can search, browse, and download 900+ OFAC enforcement cases. The database is searchable by country, year, and industry. Official Sanctions Guidance Library, where you can find guidance provided by government agencies, international institutions, and universities about how to best implement sanctions in your country. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 13 Sanctions Service Providers Directory, an invaluable resource for members looking to contact software vendors, consultants, law firms and other providers specializing in the sanctions field. Task Forces, where you can join up with your colleagues to shed light on important sanctions topics and connect with others in the sanctions community. These Task Forces are only available to ACSS Members. Online Certificate Courses In order to meet the need for more in-depth training on certain sanctions-related topics and mitigate the risk of costly sanctions violations, ACSS developed several online sanctions training courses, which teaches vital principles and background all sanctions compliance staff should understand. The online Certificate Courses are 7-part courses, consisting of approximately 6 to 7 training hours, across 4 weeks. The courses are delivered in an online format. ACSS offers the following online Certificate Courses: OFAC Essentials EU Restrictive Measures Essentials Anti-Bribery Essentials For more information and updates: https://sanctionsassociation.org/certificates/ CSS Certification The Association of Certified Sanctions Specialists offers an examination that addresses knowledge and skills common to all sanctions professionals in varied employment settings, including financial institutions, international corporations, law firms, consulting companies, government, and other trades and businesses. The objective of the certification program is to set the standard for the sanctions profession, and to make Certified Sanctions Specialists (CSS) widely recognized as trained and credentialed specialists in the sanctions field. It is a multiple-choice, proctored exam that can be taken in testing centers across the globe. Why this Certification? Career opportunities abound for the sanctions specialists, but the days are over that just anyone can fulfil that role. Especially in these days, the “consumer” of the services of a compliance officer or other sanctions expert has become more vigilant, demanding quality. This demand is exacerbated by the media’s constant attention to sanctions issues arising at financial institutions, or international businesses. Certification of the sanctions professional in organizations that are vulnerable to the problem is designed to meet this consumer concern. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 14 Benefits of Certification Pride Growth Employment Financial Rewards Reputation Achievement Testing Centers We have partnered with a world leader in brick and mortar testing centers. We also offer secure online proctoring. CLOSE TO YOU Over 5,100 test centers in over 190 countries. Located at over 2,560 different cities. FLEXIBILITY A scheduling portal finds the center nearest to you and helps you schedule the date and time of the test. COMMUNICATION Get support, reminders, and directions to the test center. HELP Our testing centers are started with personnel that will guide through the identification process and testing protocols. What is on the exam? The exam will focus on various aspects of the sanctions subject. A job analysis will determine the content and the importance of each knowledge area for the specialists in the field. The certification exam will be tailored to international best practices and basic frameworks for sanctions efforts around the world. I. Sanctions Regime Types, Goals, Prohibitions and Effects II. Sanctions Imposers and Targets III. Sanctions Evasion: Typologies and Schemes IV. Essential Components of a Risk-Based Sanctions Compliance Program in Different Industry Settings V. Role of Technology and List Screening www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 15 VI. Other Operational Issues Contributing to an Effective and Efficient Sanctions Compliance Program VII. Enforcement and Conducting or Supporting Investigations into Sanctions Violations Administration of the exam Since ACSS members reside worldwide, ACSS uses a computerized exam. ACSS offers the exam throughout the year in brick and mortar testing centers, plus through online proctoring. Requirements to sit for the exam include the completion of an ACSS exam application and payment of an application fee. For more information see here: https://sanctionsassociation.org/css-process/. Who can take the exam? ACSS Certification eligibility is based on a points system. Candidates who wish to take the CSS Examination must have a minimum of 40 qualifying credits based on education, other professional certification, and professional experience in the sanctions field (see below), in addition to providing 3 references. Further, you must be an active member of ACSS in order to sit for the exam. Point system: I. Education: a. Associate Degree: 10 credits b. Bachelor’s Degree: 20 credits c. Master’s Degree/PhD/JD or equivalent: 30 credits II. Professional experience: a. Each year of full-time experience in sanctions or related duties. b. Professional experience is limited to 3 years: 10 credits per year III. Training: a. Professional Certification – CPA, CPP, CRCM, CAFP, CFE, CAMS, CGSS, ETCI ECoP, Finra Series, etc: 10 credits per certification. b. Attendance at a course / seminar / webinar / conference / training / certificate courses or educational session on the topic of sanctions, trade compliance or export controls or related subjects (includes internal training, external training, government agency training) – 1 credit per hour. For more information, visit: https://sanctionsassociation.org/ www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 16 www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 17 SANCTIONS REGIME TYPES, GOALS, PROHIBITIONS AND EFFECTS Association of Certified Sanctions Specialists (ACSS) 7950 NW 53rd Street Suite 337 Miami, FL 33166 Phone: +1 305 433 7187 [email protected] www.sanctionsassociation.org www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 18 Sanctions: Definitions and Objectives “{W}e must develop alternatives to violence that are tough enough to actually change behavior — for if we want a lasting peace, then the words of the international community must mean something. Those regimes that break the rules must be held accountable. Sanctions must exact a real price. Intransigence must be met with increased pressure — and such pressure exists only when the world stands together as one.” Barack Obama (Nobel Peace Prize Acceptance Speech, Oslo, 9 December 2009) What Are Sanctions? Sanctions are financial, physical, and other measures taken to prevent certain types of activities or to influence the behavior of countries, groups, or individuals. Economic sanctions have traditionally been defined as the “deliberate, government-inspired withdrawal, or threat of withdrawal, of customary trade and financial relations with a target country in an effort to change that country’s policies.” 1 In other words, economic sanctions are legal measures that typically restrict or prohibit trade and financial transactions with specified targets. Sanctions may also allow certain types of behavior, such as investment in a sanctioned country, but require that it be reported. A key point is that sanctions are legal measures; they have the force of law, and failure to comply with them can give rise to potentially severe penalties. One important aspect of economic sanctions is that they are to a large extent self- enforced, as their effectiveness depends primarily on voluntary compliance. In this way they differ from military measures, such as naval blockades. Sanctions are also different from other trade measures, although they may shade into one another. The imposition of import or export duties or quotas, for example, are not generally considered to be economic sanctions. In general, economic sanctions are used to accomplish political rather than economic goals, although the difference between the two can be subtle. Throughout this guide, the country imposing sanctions is identified as the sanctioning country. The country that is the target of the sanctions is referred to as the target country. Sanctions Objectives Sanctions may have several different objectives. These include: To deny resources to the target, with the aim of making certain activities, such as terrorism or narcotics trafficking, impossible; To persuade or compel the target to change its practices 1Gary Hufbauer & Barbara Oegg, A Short Survey of Economic Sanctions, INST. FOR INT’L ECON. (Aug. 2001), http://www.ciaonet.org/casestudy/hug01/. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 19 To penalize the target for its practices To make a symbolic political statement, either to domestic political constituencies or to the global community as a whole These are largely political goals, and the imposition and administration of sanctions is inherently political. This means that sanctions can change, often quite rapidly, in response to political events. There is a tendency for sanctions, once imposed, to remain in place, whether or not they have proven effective in accomplishing their goals. The History of Sanctions The use of economic sanctions as a formal instrument of policy goes back to at least 432 B.C.. In that year, Pericles, the Athenian statesman, proposed a ban that would prohibit citizens of Megara, a nearby Greek city-state, from harbors and markets throughout the Athenian empire. In this respect, the Megarian decree resembled a modern economic embargo. Even “targeted” sanctions and secondary sanctions have a long history. Between 232 and 225 B.C., Rome prohibited anyone (including non-Romans) from buying gold or silver from or selling it to the Gauls. A more recent example occurred in 1531, when Zurich and other Protestant cantons in Switzerland prohibited the sale of flour, salt, iron, and wine to Catholic cantons, on the grounds that the latter had violated their treaty obligations to respect the rights of minority Protestants. The history of economic sanctions in the United States – probably the greatest user of sanctions – goes back to the War of Independence. The United Kingdom launched a naval blockade of the rebellious colonies; in response, the Continental Congress banned all ships from Britain and its dominions from U.S. ports. After independence, the United States continued to use sanctions as an instrument of policy preferable to military force. In 1806, the United States banned the importation of a range of goods from Great Britain. In 1807, it enacted a general embargo on foreign trade in an attempt to put economic pressure on Great Britain and Napoleonic France by denying them both exports to and imports form the United States. The embargo backfired, causing almost immediate damage to the American economy, and was revoked less than two years later. U.S. sanctions began to assume their current form during World War I, when the United States seized and froze (and in some cases sold off) assets belonging to the German government and German companies. The most famous example is Bayer aspirin. Great Britain applied similar measures in conjunction with its naval blockade of Germany during the war. A major development after World War I was the emergence of multilateral sanctions. The Covenant founding the League of Nations specifically authorized its members to use economic sanctions against countries committing military aggression, although such sanctions were in fact only weakly applied. This concept www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 20 was carried forward and expanded with the United Nations, which has employed sanctions much more widely and, arguably, effectively. The key principle of sanctions has been that they allow countries to take action without resorting to military force. Not surprisingly, the use of sanctions may under some circumstances exacerbate rather than reduce tensions. The U.S. embargo of exports of oil and scrap metal to Japan in response to Japan’s invasion of China, for example, is often given as one of the reasons for the Japanese attack at Pearl Harbor. Since World War II, sanctions have become increasingly common, and increasingly complicated. Over time, sanctions have tended to become more focused and targeted. Despite doubts over their efficacy, it is likely that the use and scope of sanctions will only expand in the near term. Sanctions Regimes Sanctions are usually imposed by countries, although, as discussed below, they may be imposed by international organizations as well. Sanctions may be imposed unilaterally, by a single country, or multilaterally, as is the case with sanctions imposed by the United Nations. Countries may impose sanctions individually, but in coordination and cooperation with allies, as happened with the U.S. and EU sanctions against Russia following events in Ukraine in 2015. Sanctions are imposed through legal acts. Depending on the country, these may take the form of laws, regulations, executive proclamations, administrative guidance, and administrative and judicial decisions. A country’s sanctions laws will cover a number of topics, including what types of sanctions are applied; who they apply to (sanctions targets); who must comply with them (sanctions subjects); what the penalties for non-compliance are; and who administers and enforces the sanctions. The totality of a country’s sanctions laws, addressing all of these topics, are known as a sanctions regime. The set of sanctions targeting individual countries or categories (such as terrorists or narcotics dealers) are commonly called sanctions programs. Imposers of Sanctions Sanctions can be imposed by any level of government. Sanctions imposed by federal governments apply throughout the country. In addition, subsidiary levels of government, such as the states in the United States, may impose additional sanctions, but these will apply only to the state itself. In the European Union, sanctions can be imposed at both the Union and the national level. Member states must comply with all Union-level sanctions, but can also impose their own sanctions. International organizations also impose sanctions. The most obvious example is the United Nations. As discussed below, the UN cannot require its member states www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 21 to comply with UN sanctions, although most do. Other international organizations, such as the World Bank, may impose sanctions as well. Sanctions Targets Sanctions typically target either entire countries or, less commonly, regions within a country. Sanctions targeted at countries may apply only to individuals and entities within the country, or to nationals and entities of the country world-wide. Sanctions may also target governments (as opposed to countries themselves). Comprehensive sanctions employ extensive trade embargoes against the target of sanctions and involve wide-sweeping bans on trade, diplomatic relations, and or other relationships between target and sender. For example, sanctions that prohibit the import or export of goods and services that benefit a country or region. Targeted or list-based sanctions impose sanctions on specific items or restrictions on a person or on groups of specific people. For example, sanctions that that target specific individuals and entities of a country or region. Sectoral sanctions: Target a specific industry of a country or region. Sanctions can apply to named individuals. They may also be imposed against groups or organizations (such as Al Qaida), companies, or other legal or unofficial entities. They may even apply to inanimate objects such as ships or airplanes. Subjects of Sanctions The “subjects” of sanctions are those who are required to comply with them. Sanctions generally require compliance by the nationals of the country applying the sanctions. This is true wherever they might be located, even if it is outside the country. Persons physically present in a country must also obey its sanctions, regardless of their citizenship 2. Entities, such as corporations, organized under the laws of a country must also comply with its sanctions. This is true of their foreign branches as well. Whether or not their foreign subsidiaries must also comply with the sanctions, depends on the sanctions. These types of sanctions are referred to as “direct” or “primary” sanctions. More rarely, sanctions may impose duties or prohibit conduct by non-nationals, including citizens of other countries or foreign companies operating outside the sanctioning country. These are called “secondary” sanctions. Their validity under international law has been questioned, and the application of sanctions to foreigners may raise political issues as well. At present, the United States is the 2 This includes the European Union, although the EU is technically an international organization rather than a state. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 22 only country that extensively applies secondary sanctions. Secondary sanctions tend to be somewhat more focused than primary sanctions. Secondary Sanctions Also called “extraterritorial” sanctions; Extend power of U.S. law indirectly, to non-U.S. firms; May directly prohibit foreign subsidiaries of U.S. companies from engaging in certain types of activity; May indirectly target non-U.S. firms by trying to restrict their access to the U.S. market; Create risk areas for non-U.S. companies. Penalties The duty to comply with sanctions implies that there are penalties for non- compliance. The most common penalties for failing to comply with sanctions are fines. Penalties may also include administrative measures, such as the revocation of licenses or prohibitions against conducting certain activities, such as exporting. Another common “penalty” is the requirement that an organization strengthen its internal sanctions compliance system. In some cases, egregious violations of sanctions requirements may even lead to imprisonment. Finally, violating sanctions may subject the person or organization to designation as a sanctioned party, which can result in the freezing of assets and similar measures. Administration What agency or entity administers and enforces the sanctions laws of a country varies by country. Administration may either be assigned to a dedicated agency (as in the United States) or performed by an agency as part of its overall functions (as in Netherlands, for example). Administration and enforcement may be shared or split between various agencies. It is common in particular for different agencies to enforce sanctions and to issue export or import licenses. Given the importance of the banking system in the administration of sanctions (as discussed in Chapter 3 below), bank regulators are usually heavily involved in sanctions administration and enforcement. Common Types of Sanctions Sanctions programs may be very broad, or quite targeted. Broad programs that prohibit most are all transactions are often referred to as embargos. Narrow programs, on the other hand, may affect only trade in selected products, such as weapons. While sanctions can vary greatly, they tend to fall into a few common categories. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 23 Prohibitions on Imports Imports from the target country or region are prohibited. These may include imports of goods, services, and technology. The prohibition may apply only to selected products, or to all imports from the country in question. Prohibitions or Restrictions on Exports Prohibitions on exports are another common form of sanctions. There are two common approaches to export prohibitions. One is to prohibit all exporters, although here may be exceptions, such as exports of agricultural products and medicines and medical products. The other is to specify what products are subject to the export ban, with all other exports being permissible. Exports typically include not just goods, but services and technology as well. Significantly, “services” typically include financial services, which would encompass basically everything banks do, as well as insurance and investment services. Exports of technology include software. As discussed below, the definition of “export” can be very broad, and can reach the transmission of software or information over the Internet, as well as the disclosure of information to nationals of a target country. Many countries, including the United States, the United Kingdom, and the European Union, impose controls on the exportation of at least some products, typically those with military uses. Export controls are not necessarily sanctions, and may be administered by different agencies. The relationship between the two is discussed in Chapter 6. Arms Embargos A prohibition on exports of military items is frequently the first type of sanction imposed against countries. The prohibition will normally cover both arms and items that are used for military purposes. The prohibition may cover either specified items or all goods, services, or technology used by the military. This means that it may be legal to export a product for civilian use, for example, but not for use by the military. Product-Specific Embargos General prohibitions on any trade in specified products are another common form of sanctions. The objects of such product-specific embargos include bullion, precious metals, luxury goods, and petroleum. Prohibitions or Restrictions on Investment A country may prohibit or limit investment in another country. This typically takes the form of a prohibition on new investment. The prohibition may be general, or www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 24 may apply only to investment in designated sectors. Such prohibitions do not normally require the liquidation of existing investments. Other restrictions, such as those on the export of financial services or on financial transactions, may severely affect the value of investments in sanctioned countries by limiting the ability to repatriate profits from such investments or to provide funds for repairs or expansion of the investment. Prohibitions on Financial Transactions These sanctions may prohibit any type of financial transaction, including processing payments, making loans, or providing any kind of banking, insurance or investment service. Unlike the previous types, prohibitions on financial transactions can apply to individuals and organizations as well as to entire countries. Prohibition on Providing Economic Resources At their most sweeping, sanctions may prohibit providing any economic resources to sanctions targets. Economic resources include funds, financial assets, or indeed anything of economic value. This type of sanction is typically applied to individuals or organizations rather than entire countries. Asset Freezes Probably the most far-reaching type of sanction is the freezing of assets. The sanctioning country will require that its nationals (including its banks) freeze funds, financial instruments, other assets, and indeed any property belonging to a sanctions target that come under their control. The party freezing the assets must hold them, typically in a separate, designated account, until directed by the government to release them. The sanctions target continues to own the assets, at least theoretically, but cannot access them. There may be limited exceptions, such as the ability to use frozen funds to pay living expenses. Asset freezes are most commonly directed against individuals and organizations, although they may apply to all property owned by a government. Sectoral Sanctions A more recent type of sanctions are sectoral sanctions. These are, as the name implies, directed against specific sectors of the economy of a country, such as the banking, energy, or defense sectors. Sectoral sanctions usually apply only to identified companies. They normally prohibit some, but not all, transactions involving those countries and sectors. A policy maker would opt for sectoral sanctions rather than blocking or asset freeze prohibitions because some targets are so interconnected to the global www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 25 economy that a sudden disruption caused by asset free/blocking would have harmful, unintended consequences for the global economy. Not surprisingly, sectoral sanctions can be very complicated. Travel and Transit Restrictions Travel bans are a common type of sanction. They prohibit either named persons or government officials of the target country from entering the country applying the sanctions. There may be exceptions, such as for travel by prohibited government officials to meetings of the UN or other international organizations. Transit restrictions may prohibit goods from a sanctioned country from passing through the territory of the country imposing the sanctions, or goods from the country imposing sanctions from passing through the territory of the target country, even if they are destined for a non-sanctioned country. Such prohibitions may include goods being carried on ships or planes that stop in a sanctioned country, even if they are not unloaded, but rather continue on their way to a non- sanctioned destination. Reporting Requirements In some cases, sanctions do not prohibit transactions with a target country, but require that it be reported. The United States, for example, requires that companies with publicly-traded stock include a statement as to whether they do business with Iran. The theory behind this type of sanctions is that adverse publicity will convince companies not to do business with target countries, even if such business is not technically prohibited. Circumvention and Facilitation Not surprisingly, targets of sanctions frequently seek to evade them. The methods for evading sanctions are discussed in detail in Chapter 4. For this reason, attempting to circumvent sanctions is itself prohibited as well. Facilitation is similar to circumvention. U.S. sanctions programs generally prohibit U.S. persons (wherever located), or non-U.S. persons located in the U.S., from facilitating transactions by foreign persons when those transactions would be prohibited if they were undertaken by U.S. persons themselves. Examples of “facilitation” include: Approving, directing, assisting, supporting, financing or insuring transactions in or with a U.S. sanctioned country; Making any purchase for the benefit of a prohibited transaction; Negotiating with customers/potential customers in U.S. sanctioned countries; www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 26 Participating in meetings or on calls with nationals of sanctioned countries for the purpose of furthering a prohibited transaction; Approving expenses or providing financing related to a prohibited transaction; Arranging freight forwarding, customs brokerage services or similar support services related to a prohibited transaction; and Negotiating, drafting or reviewing commercial terms/contracts related to a prohibited transaction. Types of activities unlikely to be considered by OFAC to constitute unlawful “facilitation” include the following: Seeking legal advice regarding the application of U.S. sanctions law to proposed transactions (but beware certain actions taken in furtherance of such advice); Transactions carried out independently by a foreign subsidiary, with no involvement by U.S. persons, wherever located, or non-U.S. persons located in the U.S.; or Providing back office shared functions by U.S. persons, wherever located, or non-U.S. persons located in the U.S., as long as these activities are purely clerical and do not specifically relate to a prohibited transaction. Facilitation provisions under U.S. sanctions programs are measures that make it an offense for any U.S. person to approve, facilitate, guarantee or finance any transaction by a foreign person where the transaction by that foreign person would be prohibited if performed by the US person. Iranian Transactions and Sanctions Regulations, Subpart B, Prohibitions § 560.208 Prohibited facilitation by United States persons of transactions by foreign persons. Except as otherwise authorized pursuant to this part, and notwithstanding any contract entered into or any license or permit granted prior to May 7, 1995, no United States person, wherever located, may approve, finance, facilitate, or guarantee any transaction by a foreign person where the transaction by that foreign person would be prohibited by this part if performed by a United States person or within the United States. In summary, U.S. sanctions laws prohibit persons subject to a sanctions regime from assisting a foreign person not subject to that sanctions regime from undertaking an action that would be prohibited if performed by the subject person. Facilitation is also discussed in Chapter 4. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 27 Exceptions to Sanctions The precise scope of sanctions differs by country and program. Certain exceptions to sanctions are common around the world, though. These include licenses and exemptions. An action is exempt from sanctions if the sanctions laws simply do not apply to it, or otherwise authorize it. Common exemptions include transactions involving mail and telecommunications, humanitarian donations, family remittances, and payments for overflight privileges. A license, on the other hand, is permission to perform an action that would otherwise be prohibited. Licenses may be specific or general, as discussed below. The distinction between an exemption and a license is not always clear, especially with respect to so-called general licenses. The following categories of transactions are frequently (though not universally) exempted from sanctions laws: Post and Telecommunications Sanctions laws almost always allow communication with a sanctioned country, whether through the mail or via telecommunications. The latter includes e-mail and text messages as well as telephone calls. As part of this exemption, telecommunications companies are commonly allowed to make payments to government authorities in sanctioned countries, as well as to local telecommunications providers. Precisely what is allowed, however, can be complicated. Moreover, the exemption for telecommunications does not necessarily allow investment in the sanctioned country in the equipment needed to carry telecommunications. Humanitarian Donations Donations for humanitarian purposes are another frequent exception to sanctions laws. The potential for misuse of this exception is obvious, though, so that donations may be restricted or prohibited under some circumstances. The details of the exemption will specify what types of donations are allowed (such as food, medical supplies, tents and blankets), as well as what types of organizations can receive such donations. Family Remittances A less common exemption is for family remittances. The theory is that sanctions should not prevent families from supporting each other. Again, the potential for abuse is obvious. Exceptions for family remittances commonly require that the remittance be for personal rather than commercial use. There may also be a limit on the amount that can be remitted in any one year. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 28 Informational Materials Sanctions are imposed for political reasons, often with the objective of changing the behavior, or even the government, of a target country. The free flow of information can aid in this process. Accordingly, sanctions regimes and programs frequently exempt informational materials – books, music, movies, and information in general – from the reach of sanctions. Of course, this exception is subject to export controls and other measures, especially where information regarding technology is concerned. In addition, the exception commonly refers to materials already in being; a book co-written by an American and an Iranian, for example, would still violate U.S. sanctions against Iran, despite the general exemption for informational materials. Travel and Travel Expenses Sanctions may or may not include a prohibition on travel to sanctioned countries. The United States, for example, prohibits travel by U.S. nationals to Cuba or North Korea, with certain exceptions. Travel to Iran or Syria, on the other hand, is allowed. Where travel is not prohibited, sanctions laws generally include an exemption for travel expenses, with the requirement that the expenses be directly related to travel. Overflight Payments Countries generally charge for the right to pass through their airspace. Rerouting flights to avoid sanctioned countries is in many cases simply not practical. For this reason, sanctions laws almost always contain an exemption for overflight payments. This exception also includes the right to pass through the airspace of a sanctioned country. Agricultural Products When countries impose sanctions on other countries, it is common for them to insist that their objective is to change the behavior of the government of the country, not to punish the population as a whole. For this reason, sanctions laws commonly exempt agricultural exports (but not necessarily imports). The underlying theory is that food should not be used as a weapon. The laws may provide a broad exemption, or identify in detail which products are or are not exempt. Use of the exemption may also require the exporter to follow certain procedures, including how payment can be made. Medicine and Medical Products Medicine and medical products are normally exempted from export prohibitions as well. As with agricultural products, the relevant sanctions program may describe in some detail what products, services, and technology benefit from the exemption. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 29 Licenses Governments may decide to allow transactions that would otherwise be forbidden by sanctions. This permission normally takes the form of a license. While the details of licensing vary by country, a license typically identifies who may perform the action; exactly what action may be performed (the sale of a particular product, the provision of services, etc.); who the product may be provided to; and how long the license is valid. In the United States, there are actually two forms of licenses: specific or general. A specific license authorizes one transaction, or a series of transactions. The license applies only to the products and parties identified in the license, and usually has a set period. A general license, on the other hand, is available to all parties meeting its conditions, and does not require an application. In this way, a general license resembles an exemption. Unlike exemptions, though, a general license may be valid only for a specified period. In addition, the authority administering the sanctions laws may be able to revoke a general license on its own, while changing an exemption may involve a change to the underlying sanctions law itself. For this reason, general licenses may provide somewhat less assurance going forward than supplied by an exemption. The subject of specific and general licenses under U.S. law is addressed in more detail in Chapter 3. Effectiveness and Unintended Consequences The purposes of sanctions are to prevent certain types of activities and to persuade (or force) governments and others to change their behavior. One would think that it would be relatively straightforward to measure the effectiveness of sanctions, and that if sanctions were not effective, they would be abandoned. This is not the case. Sanctions are put into place in complex geopolitical situations, and it is often difficult to determine whether they are having a positive effect or not. Empirical research indicates that sanctions are likely to be most effective if the sanctions are focused, and the goal is relatively modest. Arms embargos, for example, tend to be more effective than broader trade restrictions. Once in place, sanctions have a tendency to remain in place, whether they have proven effective or not. The U.S. embargo against Cuba, for example has been in effect in its current form since 1962, without appreciably changing the behavior of the government in Cuba. On the other hand, international sanctions are credited as being an important factor in South Africa’s decision to end apartheid. Countries do respond to changing situations, however. In contrast to its sanctions against Cuba, the United States ended its sanctions program against Myanmar in 2016 and Sudan in 2017 (although residual sanctions remain in place against each) in response to what were viewed as positive developments in those countries. The www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 30 European Union ended most sanctions against Iran following a commitment by that country to limit its nuclear activities. While the purposes of sanctions are positive, they frequently have unintended consequences. The most obvious of these is to hurt the population of the target country. Even if there are exceptions for agricultural and medical products, it is not unusual for sanctions to make it more difficult for the target country to pay for imports of food and medicine, causing real suffering, especially among the poorest segments of the population. Sanctions can also provide the government of the target country with an excuse for the country’s problems, allowing it to whip up resentment and even hatred against the sanctioning country. Sanctions can also, paradoxically, strengthen the economy of the target country in some ways, as it develops domestic industries and supplies to replace imports. Sanctions can also have a negative effect on the sanctioning country. Companies in the sanctioning country can lose both export markets and sources of supply. Sanctions may drive the target country into a more extreme position, making it difficult to resolve differences diplomatically. Finally, sanctions may create friction between allies if one imposes sanctions and another does not, as has been the case with respect to Iran since the United States ceased to observe the Joint Comprehensive Plan of Action, an agreement the European Union has continued to honor. The following article from www.sanctionsassociation.org explains unintended consequences of sanctions. The Good, the Bad, and the Ugly: The Unintended Consequences of Sanctions from a Population Perspective August 09, 2019 By: Glenda Juliano from Franklin Templeton Investments The U.S. currently maintains economic sanctions against many countries. Frequently criticized and often viewed as a paradox of U.S. foreign policy, economic sanctions are nevertheless quickly becoming the tool of choice for many countries. Sanctions are so popular in fact that many states and municipalities within the U.S. have also begun to implement their own sanctions regimes. In 2000, the U.S. Supreme Court unanimously held in Crosby v. National Foreign Trade Council that a Massachusetts law restricting state transactions with firms doing business in Burma was preempted by federal statute. Outside of the U.S., it is the policy of the European Union (E.U.) to intervene when necessary, to prevent conflict or to respond to emerging crises by taking the form of restrictive measures or sanctions. Similarly, to the U.S., European sanctions may target governments of third countries, or non- state entities and individuals, such as terrorist groups and terrorists. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 31 Whether a U.S. or E.U., the goal of sanctions is to impose a barrier in hopes of modifying unwanted behavior of a sanctioned party or country. Sanctions are meant to promote international peace and security but may also be applied to prevent conflict and to protect human rights. While the efficacy of sanctions is considered debatable by some, one thing is certain: sanctions have unintended consequences. Whilst some consequences of imposed sanctions are often perceived as detrimental, not all sanctions have negative consequences. Sanctions…. A Breeding Ground for Hate? Former U.S. President, the late Herbert Hoover, once said of sanctions that “they reared incurable hatred”. Though history has shown that in many countries, sanctions have led to increased sympathy for the incumbent government causing a “rally” effect in its population, this is not by any means always the case. It is true that certain beliefs fed by domestic propaganda can create an environment where it is easier to cultivate feelings of hatred, however, there are circumstances when a country has inadvertently benefitted from sanctions. Let’s explore a few examples. Russia: Bad for Business, Good for Homegrown Farming For instance, in Russia, direct involvement becomes difficult to handle and many of the smaller international entities are put in positions where they cannot continue to exist in the market, so they leave. This shift allows for big multinational companies to take their place. In some cases, the severity of the sanctions imposed has caused many expat employees to go back to their countries. This, in turn, also creates additional employment opportunities as several countries of the former Soviet Union that are heavily dependent on Russia for employment of their citizens. In the Russian consumer sector, while travel may be limited, those who are able travel to the region can find first class accommodations at a low price due to low occupancy rates. Imported western goods are either eliminated or unaffordable as President Putin imposes restrictions on imports of all western foods and other goods. While the restriction limits or eliminates the flow of supply, this radical change gives an enormous boost to the local farming industry. Russia’s agriculture and farming industries are growing rapidly. As an unintended consequence, Russia is transforming under pressure and finding ways to optimize its own economy in the face of new conditions. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 32 Venezuela: A Collective Punishment Unfortunately, not every country is able to take the same stance. In Venezuela, the sanctions’ regime has created a food deficit which in turn reduces the public’s caloric intake and increases disease as well as mortality rates. For countries like Venezuela, sanctions appear to be more of a collective punishment than an attempt to modify behaviors. In January of 2019, Venezuela was cut off from its primary source of oil consumption – the U.S. In March, Venezuela experienced the first week having zero oil exports, which lasted for another 2 weeks before bouncing back to 1/3rd of their previous year production during this time. Further, sanctions imposed on Venezuela also froze assets and limited access to financial markets consequently exacerbating the humanitarian crisis by limiting access to food and essential imports such as medicine. The economic collapse has also caused problems in the areas of water and sanitation, available electricity, and health care. Regrettably, Venezuela’s President, Nicolas Maduro, has not changed his position and has created an opposition that has clearly demonstrated that sanctions will have a more severe effect on the population by disproportionately harming the poorest and most vulnerable Venezuelans than its government. Regrettably, Venezuela’s President, Nicolas Maduro, has not changed his position and has created an opposition that has clearly demonstrated that sanctions will have a more severe effect on the population by disproportionately harming the poorest and most vulnerable Venezuelans than its government. Cuba…the failed attempt? The U.S. originally imposed an arms embargo on Cuba in 1958 during the armed conflict between Fidel Castro’s rebel army and President Batista’s regime. After Castro gained control of the Cuban government, he began to openly purchase arms from the Soviet Union which led to additional restrictions and reactive shows of force by Castro. Consequently, the U.S. trade embargo of Cuba was initiated in response to a 1960 memo issued by the State Department which proposed a line of action denying money and supplies to Cuba with the purpose of creating hunger, desperation, and the overthrow of the Castro government. While the U.S. embargo of Cuba certainly caused hunger in the Cuban people, the embargo itself has not affected the Castro government. The U.S. embargo on Cuba consequences are the monetary long-term and short- term outcomes in relation to trade, industry, and the creation of wealth. To www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 33 date, the government controls all aspects of the economy including the provision of food by rations while the average citizen receives $20 per month. Cuban citizens have found their ways to survive and supplement their income by opening rooms in their homes to host tourist, selling souvenirs and local cuisine to visitors. To the average citizen, this is the way of life and for many generations only life they know. Many humanitarian organizations have criticized the Cuban embargo for its effect on food, clean water, medicine, and other basic needs of the Cuban citizens. Sixty years later, some may even agree that the embargo helps Castro’s government remain in control more than it hurts and consider ita failure. Finding Balance As sanctions continue to evolve, we see constant change in restrictions and application of regulation to our business practices. Compliance suites have first and foremost, professional responsibility. We are best equipped to conduct business if we educate ourselves and understand the complexity of sanctions. There are many restrictions but there are also areas that allow for certain transactions to be completed. Below are some best practices that can be incorporated and adapted based on business needs: 1. Know Your Customers – maintain detailed information of your customers in a central location accessible to all business areas. The information should be current and frequently maintained. 2. Create and maintain a robust monitoring process. 3. Stay current with regulatory changes and communicate these changes promptly. 4. Seek solutions that integrate system functionalities to make process seamless for the business and the client regardless of your industry. There is a delicate balance between compliance and service and with the right understanding we can feel confident when allow business processes to flow while managing risk appropriately. Summary Economic sanctions are financial, physical, and other measures taken to prevent certain types of activities or to influence the behavior of countries, groups, or individuals. Sanctions may be imposed by a single country, a group of countries, or an international organization. The objectives of sanctions include o Preventing certain activities, such as terrorism and dealing in narcotics o Persuading governments to change their behavior o Penalizing (or punishing) the sanctions target o Making a symbolic statement www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 34 The history of sanctions dates back at least to classical Athens. Since the end of World War I, the use of sanctions has become more common as an alternative to military action. Sanctions can be imposed unliterally or multilaterally. Sanctions can be broad/comprehensive (“e.g. embargoes”) or targeted. A sanctions regime is the overall structure of a country’s sanctions laws, including o Which agency administers and enforces sanctions; o The targets of sanctions; and o Who must comply with the sanctions. A sanctions program refers to the specific sanctions against an individual country or category of persons. Sanctions can apply to countries, governments, regions, entities, unofficial groups, individuals, and vessels and aircraft. Typical sanctions include o Arms embargos o Prohibitions on exports o Prohibitions on imports o Prohibitions on investment o Prohibition on financial transactions o Prohibitions on making any financial resources available o Asset freezes o Travel bans. Sectoral sanctions are targeted sanctions that apply only to selected sectors of a country’s economy. o Sectoral sanctions may allow most transactions with the country Sanctions typically have certain exceptions for o Post and telecommunications o Humanitarian donations o Family remittances o Informational materials. A license authorizes a transaction that would otherwise be prohibited by sanctions. Sanctions can have unintended consequences, including o Causing suffering to the population of the target country o Providing an excuse for poor conditions by the government of the target country o Loss of export markets and sources of supply in the sanctioning country. Review Questions 1. What are sanctions? 2. Give three objectives of sanctions. 3. What is the difference between a sanctions regime and a sanctions program? www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 35 4. What are the components of a sanctions regime? 5. Who can sanctions apply to? 6. Who must obey a country’s sanctions? 7. Give five examples of economic sanctions. 8. Give three examples of exceptions to sanctions. 9. What are some of the unintended consequences of sanctions? www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 36 www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 37 SANCTIONS IMPOSERS AND TARGETS Association of Certified Sanctions Specialists (ACSS) 7950 NW 53rd Street Suite 337 Miami, FL 33166 Phone: +1 305 433 7187 [email protected] www.sanctionsassociation.org www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 38 Introduction “We don’t impose sanctions on Russia for sanctions’ sake, rather we impose sanctions to make clear that countries, even if their territorial situation puts them close to Russia, have the right to their own development. Those are the principles of international law.” Angela Merkel (2018) Economic sanctions are imposed by both countries and international organizations. A sanctions regime is how a polity actually imposes sanctions. The regime includes a number of components: The legal sources of sanctions; The reasons for imposing sanctions; The targets of sanctions; The measures being applied, i.e., the types of sanctions; Who must comply with sanctions; and Compliance and enforcement. These not surprisingly vary by the individual sanctions regime. One common feature of sanctions regimes world-wide is that they reflect the sanctions imposed by the United Nations, although many go well beyond that. This chapter will discuss the sanctions regime of the United Nations and the major countries who are significant users of economic sanctions, including the European Union, the United States, the United Kingdom, Australia, Canada, and Singapore. United Nations From its creation, the United Nations contemplated the use of economic sanctions as an instrument to preserve peace without the need to resort to military force. Since then, the United Nations has declared sanctions in at least 31 cases. The targets have been primarily countries that threaten the peace, although the UN has also sanctioned organizations such as Al Qaeda as well. Sanctions imposed by the UN do not automatically take effect. Rather, individual countries must implement them through national law or other action. Most UN members do so on an ongoing basis. In addition, many companies have decided to observe UN sanctions, even if not required to do so by national law. For this reason, it is important to understand how and when the UN imposes sanctions, and what the sources for information on UN sanctions are. Legal Basis: The UN Charter The ability of the United Nations to impose economic sanctions is found in the UN Charter, the legal document that founded the UN. Article 41 of the Charter provides that: www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 39 The Security Council may decide what measures not involving the use of armed force are to be employed to give effect to its decisions, and it may call upon the Members of the United Nations to apply such measures. These may include complete or partial interruption of economic relations and of rail, sea, air, postal, telegraphic, radio, and other means of communication, and the severance of diplomatic relations. Since 1968, the Security Council has imposed sanctions at least 31 sanctions times. The targets have included, chronologically, Southern Rhodesia, South Africa, Yugoslavia, Haiti, Angola, Liberia, Eritrea/Ethiopia, Rwanda, Sierra Leone, Iran, Côte d’Ivoire, Somalia/Eritrea, , Iraq, the Democratic Republic of Congo, Sudan, Lebanon, North Korea, Iran, Libya, the Taliban, Guinea-Bissau, Central African Republic, Yemen, South Sudan, and Mali. The UN has also imposed sanctions against ISIL (Da’esh), Al-Qaida, and the Taliban The UN currently has 14 programs in effect. Information on these programs can be found on the UN web site. Did you know? The first UN sanctions program in 1966 was against the illegitimate seizure of power in Southern Rhodesia. The oldest UN sanctions program, still in place today, concerns Somalia (established in 1992). The shortest regime was Eritrea/ Ethiopia, which lasted less than 1 year: 17 May 2000 to 15 May 2001. The Process UN sanctions are imposed by the Security Council. The Security Council can take action to maintain or restore international peace and security under Chapter VII of the United Nations Charter. Sanctions measures, under Article 41, encompass a broad range of enforcement options that do not involve the use of armed force. The process begins with the Security Council taking up a “situation of concern.” Situations that typically give rise to the imposition of sanctions by the UN include: massive human rights violations illegal smuggling activities by extremist groups efforts to end civil wars or similar conflicts threats to elections demobilization of armed groups. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 40 Often just the fact that the Security Council is considering action may be enough to convince the parties involved to change their behavior. If it does not, the Security Council will consider a resolution imposing sanctions and creating a sanctions program. The resolution will specify exactly what measures are to be put into place. Finally, the resolution will establish a committee to oversee the sanctions program in question. Resolutions in the Security Council are subject to veto by one of the permanent members. Because UN sanctions require unanimity on the part of the Security Council, these sanctions, when imposed, represent a broad consensus within the international community that some sort of action is necessary. The Committees carry out the actual work with respect to a sanctions program. Their role is to implement, monitor and provide recommendations to the Council on particular sanctions regimes. A committee may request advice and meet with various Panels of Experts. Did you know? Sanctions Committees and Expert Panels Today, there are 14 ongoing sanctions regimes which focus on supporting political settlement of conflicts, nuclear non- proliferation, and counter-terrorism. Each regime is composed of a sanctions committee chaired by a nonpermanent member of the Security Council. There are ten monitoring groups, teams and panels that support the work of the sanctions committees. Seven are home- based, two are based in New York and one is based in Nairobi. There are a total of 61 experts who report to their respective sanctions committees but are managed by the Security Council Affairs Division (SCAD) of the Department of Political Affairs (DPA). SCAD provides experts with substantive guidance and support, and these monitoring groups, teams and panels cost under $24 million a year. Source: Feb. 8 2019 Fact Sheets “Subsidiary Organs of the United Nations Security Council” The committee may also meet with Member States and international organizations. One important function of a committee is to identify exactly who is subject to sanctions. In some cases, the resolution creating a sanctions program may identify individuals or groups that will be subject to the sanctions, but in many cases, it is the responsible committee that does so. Action by the Security Council is also needed to remove sanctions. The Security Council will lift sanctions when and if the situation underlying the imposition of sanctions has been resolved. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 41 UN sanctions do not automatically go into effect in individual countries, and the UN has no independent mechanism for enforcing sanctions. Rather, sanctions must be implemented by the individual members. Most UN members have a process where UN sanctions, including new designations, are incorporated into national law. This process typically requires the enactment of legislation or regulation that adopts the UN sanctions. In addition, many companies have the policy of declining to do business with individuals or entities that are subject to UN sanctions, even if their country has not imposed those sanctions. Designation The United Nations can and does impose sanctions against entire countries, such as is currently the case with North Korea. More commonly, though, sanctions are imposed against individuals and entities. Even though the United Nations will impose sanctions against a country, those sanctions usually take the form of measures targeted at named individuals or entities rather than the government or the country as a whole (North Korea again being a notable exception). The types of actions that can lead to designation by the United Nations include: threats to peace, security or stability; violations of human rights and international humanitarian law; obstructing humanitarian aid; recruiting or using children in armed conflicts; targeting civilians including killing and maiming, sexual and gender-based violence, attacks on schools and hospitals, and abduction and forced displacement; engaging in illegal trade in natural resources; violations of arms embargoes; acts or financing of terrorism; engaging in or providing support for nuclear, weapons of mass destruction and/ or ballistic missile programs and policies. Once a person or entity is designated, it is placed on the UN’s Consolidated List, which can be found at: https://www.un.org/securitycouncil/content/un-sc-consolidated- list#composition%20list. Types of Sanctions In the past, the UN has imposed very broad sanctions, including complete trade embargos. Since 2004, it has relied on more focused sanctions. Current sanctions methods include: travel bans; asset freezes; arms embargoes; www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 42 bans on trade in certain commodities, such as diamonds, timber, petroleum, and charcoal; bans on exports of certain items to the country; bans on imports of selected items from the country; restrictions on exports to the country of goods and technology related to nuclear, ballistic missiles and other weapons of mass destruction; and bans on the export of certain luxury goods. These measures can apply to individuals, entities, or entire countries. For example, the arms embargo against Somalia applies to the entire country except for arms shipments to the Federal Government of Somalia, which are nonetheless subject to strict controls. Current Sanctions Programs The United Nations currently has 14 sanctions programs in place. Of these, 12 apply to countries, while two are directed against entities. As noted above, sanctions programs against countries may in fact target specific individuals and entities rather than the entire country. The following are the programs in effect as of August 2019. The number refers to the number of the resolution in the Security Council instituting the sanctions. 1. Somalia (Resolution 751 2. ISIL (Da’esh), Al-Qaida and associated individuals, groups, undertakings and entities (Resolutions 1267, 1989 and 2253) 3. Iraq (Resolution 1518) 4. Democratic Republic of the Congo (Resolution 1533) 5. Sudan (Resolution 1591) 6. Lebanon (Resolution 1636) 7. North Korea (Resolution 1718) 8. Libya (Resolution 1970) 9. Taliban (Resolution 1988) 10. Guinea-Bissau (Resolution 2048) 11. Central African Republic (Resolution 2127) 12. Yemen (2140) 13. South Sudan (Resolution 2206) 14. Mali (Resolution 2374) De-listing Mechanisms The United Nations is very aware of the potential impact of inclusion on its sanctions list. As a consequence, it has two separate procedures by which individuals and entities can seek to be removed from the list. First, there is a specific “Focal Point for De-Listing.” An individual or entity (except for those on the ISIL and Al-Qaida list) can file an application with the Focal Point for De-listing seeking removal from a sanctions list. The Focal Point also receives www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 43 requests for exemptions from travel bans and assets freezes exemption requests from individuals and entities on the ISIL (Da’esh) and Al-Qaida and the Taliban Sanctions lists. While the Focal Point receives and processes such requests, the actual decision whether to de-list rests with the relevant sanctions committee. Requests for removal from the ISIL and Al-Qaida lists are handled by the Office of the Ombudsman. European Union The European Union is one of the major users of economic sanctions. The EU system is unusual in that, although sanctions are promulgated by and for the EU as a whole, they must be implemented and enforced by the individual members. In addition, EU members may impose sanctions that go beyond those of the EU itself. The EU refers to sanctions as both “sanctions” and as “restrictive measures.” They are considered to be preventive, non-punitive, instruments that allow the EU to respond swiftly to political challenges and developments. The reasons the EU imposes sanctions include: Safeguarding values, interests and security Preserving peace Consolidating and supporting democracy, the rule of law, human rights, and principles of international law Preventing conflicts and strengthening international security EU’s Common Security and Foreign Policy (CFSP) The EU is made up of 28 members states and seven different decision making bodies, most of which were established during the inception of the EU in 1958. This includes two legislative bodies called the Council of the European Union (the Council) and the European Parliament. Sanctions have become an increasingly important tool of the EU’s Common Security and Foreign Policy (CFSP). According to Articles 29 and 31 of the Treaty of the European Union (TEU), the Council must adopt CFSP decisions involving sanctions on a unanimous basis among Member States. Legal Basis The EU applies Sanctions within the framework of the Common Foreign Security Policy. This is the agreed foreign policy by the members of the EU. Sanctions are one element of this foreign policy. The legal basis for the imposition of sanctions by the EU is Article 215 of the Treaty on the Functioning of the European Union, which states that www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 44 1. Where a decision, adopted in accordance with Chapter 2 of Title V of the Treaty on European Union, provides for the interruption or reduction, in part or completely, of economic and financial relations with one or more third countries, the Council, acting by a qualified majority on a joint proposal from the High Representative of the Union for Foreign Affairs and Security Policy and the Commission, shall adopt the necessary measures. It shall inform the European Parliament thereof. 2. Where a decision adopted in accordance with Chapter 2 of Title V of the Treaty on European Union so provides, the Council may adopt restrictive measures under the procedure referred to in paragraph 1 against natural or legal persons and groups or non-State entities. 3. The acts referred to in this Article shall include necessary provisions on legal safeguards. CFCP Helps the High Representative Sanctions of for Foreign a diplomatic Influence Affairs and or economic policies Security Policy European Union nature carry out the EU EXTERNAL ACTION CFSP Source: ACSS EU Restrictive Measures Essentials Course The EU has set out its fundamental sanctions policies in the Basic Principles on the Use of Restrictive Measures (Sanctions), which was issued by the EU Council in 2004. A link to the text of this document is included in the reference materials. The first principle is that We are committed to the effective use of sanctions as an important way to maintain and restore international peace and security in accordance with the principles of the UN Charter and of our common foreign and security policy. In this context, the Council will work continuously to support the UN and fulfil our obligations under the UN Charter… We will ensure full, effective and timely implementation by the European Union of measures agreed by the UN Security Council. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 45 While UN sanctions are not self-executing, this principle means that the EU will apply all UN sanctions. In addition, the EU will apply autonomous sanctions to meet various goals, including to fight terrorism and the proliferation of weapons of mass destruction a restrictive measure to uphold respect for human rights, democracy, the rule of law and good governance. This occurs in the context of the Common Foreign and Security Policy. Sanctions are only one element in an integrated policy that also uses dialog, incentives, and conditionality to achieve these goals. At the same time, sanctions should be tailored in a way that maximizes the effects on the target, while minimizing adverse effects on others. For this reason, EU sanctions tend to be targeted towards specific individuals and entities, rather than whole regions or countries. The EU publishes and periodically updates both its “guidelines” and “best practices” in connection with restrictive measures. The current versions of these documents, Sanctions Guidelines – update and Restrictive measures (Sanctions) - Update of the EU Best Practices for the effective implementation of restrictive measures, were published in 2018, and links are contained in the reference materials annex. These provide further detail on the goals, legal requirements, and internal organization of restrictive measures. The Process As you can imagine, the structure of the European Union is rather complex. First of all it has member states, each with its own legislative, executive and judicial system. In the image below, you can see the main seven EU bodies: European Court of Justice, European Central Bank, European Council – this is a body with heads of the states of the member states, then Council of the EU - this is the council of national ministers, European Commission, the so-called executive branch, and finally the European Parliament and European Court of Auditors. Article 215 provides the general framework for the imposition of sanctions by the EU. As the article requires, sanctions take the form of a measure passed by the EU Council. The measures may be directed against countries or against “natural or legal persons and groups or non-State entities.” Action by the Council begins when it receives a joint proposal from the High Representative of the Union for Foreign Affairs and the EU Commission identifying a problem and recommending the imposition of restrictive measures. After considering the proposal, the Council will decide, by a qualified majority vote (i.e., votes representing at least 65% of the EU population), whether to impose restrictive measures. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 46 The restrictive measures initially take the form of a Council decision. The decision will typically contain several elements, including The target of the restrictive measures (the country, individuals, or entities, which are usually identified in an Appendix to the decision) The reasons the measures are being imposed A direction that the Member States “shall take the necessary measures” to implement and enforce the restrictive measures A detailed description of the restrictive measures Any exceptions or exemptions to the measures that may apply The procedure for imposing restrictive measures on additional persons or entities While the Council will inform the EU Parliament of the decision, no approval by the Parliament is required, so that the decision takes effect once it is issued by the Council. Sanctions are initially imposed by a Council decision that applies measures to the country (or, more commonly, individuals and entities within the country) for the first time. The Council may subsequently issue additional decisions modifying the previous measures by, for example, adding new persons to the list. Decisions that broaden or restrict the scope of sanctions are simply called “Decisions,” while decisions adding or removing individuals and entities from the applicable sanctions list are described as “Implementing Decisions.” Decisions to extend measures are also common. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 47 The Council may also issue regulations under the decision, providing more detail, including definitions that apply to the decision such as, for example, the definition of “economic resources.” A Council regulation is required when the restrictive measures include an asset freeze or other financial or economic sanctions, where precision delineating exactly what is and is not allowed is necessary. Restrictive measures go into force when they are published in the EU Journal. Although sanctions are adopted at the EU level, the EU does not have the ability to enforce sanctions. Rather, they are enforced by national regulators at the national level. Additional action may also be necessary at the national level to www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 48 implement travel bans and arms embargoes in particular. Trade and financial sanctions, on the other hand, have automatic EU-wide effect, although again enforcement is by the individual Member States. Finally, Member States may impose sanctions beyond those imposed by the EU. This typically takes the f

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