Background
Economic operators play a vital role in ensuring that the sanctions regime is effective. Non-compliance with the sanctions regime by economic operators will dilute the effectiveness of the sanctions being imposed by the EU, the UN or other competent authorities. It is therefore key that the appropriate measures are adopted by economic operators in order to mitigate and manage sanctions evasion and circumvention risks.
Circumvention is the practice through which individuals, legal entities, legal arrangements or economic operators which are subject to sanction restrictions or prohibitions seek to evade the relevant restrictive measures. This may be done through various ways and means. Over the past years we have seen various methods being used by sanctioned individuals and entities to circumvent the relevant sanctions imposed by the EU.
The EU and UN sanctions regime apply, inter alia, to all individuals and entities within the territory of the EU. This means that even unregulated entities are required to comply with sanctions regime and should therefore ensure that they undertake the necessary measures in order to mitigate the risks of sanctions evasion. Therefore, it is key that all economic operators (irrespective of their regulatory status) assess their exposures to sanctions risks and adopt risk based measures in order to mitigate the risks of either (i) being used by sanctioned persons to evade restrictive measures or (i) participating in activities which may result in the evasion or circumvention of sanctions.
The New Guidance Issued
The aim of the newly published guidance (Detecting and Preventing Sanctions Evasion and Circumvention in Trade: Practical Guidance for Economic Operators[1]) is to provide practical insights on the type of measures which economic operators should undertake to comply with the sanctions regime. The guidance delves into risk assessments, issues to be considered as part of the due diligence procedures, red-flags and practical guidance on the due diligence measures to be applied.
- Risk assessments: The guidance sets out factors which are to be taken into account in assessing sanctions risks. One should note that the exposure to sanctions may be indirect and therefore when assessing risk exposure the risks assessed should not be limited to one’s direct counterparties only. The various risk factors which are to be assessed are also referred to in the guidance.
- Issues to be considered in the operators procedures: The guidance provides some insights on the type of questions which should be answered as part of the due diligence process which the operators should undertake prior to entering into new arrangements with counterparties or prior to undertaking an economic activity. Given the broader scope of the sanction regime, the checks extend beyond the usual ‘ultimate beneficial ownership concept’ and one is also required to assess shareholders and other parties in the event that there are higher risks of sanctions involved.
- Red-Flags: The guidance also makes reference to a lengthy non-exhaustive list of red-flags. Depending on the business model of the economic operator, these red-flags may need to be monitored by the economic operator. Whilst it is important to ensure that the red-flags are documented in the procedures of the operator, it is even more important to ensure that the employees are aware of these red-flags in order for them to be able to take the necessary action and escalate matters, if and when required.
- Practical guidance on due diligence: Lastly, the guidance note provides some practical guidance on the checks to be undertaken by operators in order to seek to detect sanction evasion. The type of information to be obtained, the type of checks to be undertaken, including open source checks on the counterparty and involved parties, as well as the checks to ne undertaken based on the goods and services offered, are referred to in the guidance.
This practical guidance note seeks to support operators in undertaking responsible business in line with sanctions obligations. Economic operators should therefore be guided by this guidance note in order to design and implement a robust risk based internal control framework to detect and prevent sanction evasion and circumvention.
[1] Link to the Guidance Note as a hyperlink – https://um.fi/documents/35732/0/FINAL+Practical+Guidance+Sanctions+Circumvention+Detection+and+Prevention+in+Foreign+Trade+CLEAN+13.7.2023.docx/8c7ecd84-85b2-5c24-a2a2-acc821438410?t=1689337388009
This article was written by Dr Mario Zerafa (Senior Associate, Investment services & funds, AML)
