The new landscape of sanctions

Date: 18 Sep 2024

Karen Jones

Sanctions & compliance guide for private wealth:

In today’s globalized world, cross-border legal issues and financial sanctions have become increasingly common, and with them, legal professionals are facing mounting responsibilities. 

Citywealth – Business Crime & Investigations

In today’s cross-border practice, sanctions compliance for lawyers now spans Interpol Red Notices, UK advisory restrictions and US primary/secondary regimes

Interpol Red Notices: what they are (and aren’t)

Recent changes in international regulations, specifically regarding Interpol’s Red Notices and sanctions compliance, have placed new legal duties on lawyers, especially those handling international or high-stakes cases. These developments require a nuanced understanding of the regulatory environment and a proactive approach to mitigate legal risks for clients and lawyers. The new landscape means even lawyers need legal advice to proceed.

Red Notices are requests for law enforcement to locate and temporarily arrest someone, but they are not international arrest warrants. Member countries decide whether to arrest someone based on their own laws. Red Notices can be removed if there are human rights issues, including the right to life, liberty, and security, and the right to be protected from torture. Red Notices can be challenged through legal proceedings if there are valid grounds. 

Crimea turning point

On the topic of sanctions, new amendments have been made recently that have wider scope and are directly affecting professional services firms. Dr Anna Bradshaw, Business Crime Department Peters & Peters who advises on this difficult topic explains, “In the Immediate aftermath of Ukraine invasion, it was not just the financial system but an entire range of services that go hand in hand with your life that came into focus. The problem today is if the risk calculation for you looks too high it means advisors will make the decision to de risk and off load you.”

“Specifically in 2022 we saw new regulations and a tightening of pre-existing capital market restrictions. They also prohibit a whole range of services including things like PR services, advertising and architecture.” She says although the latter seems to make no sense, she assumes it is to “prevent Russians accessing things that improve their lives or ability to do business in the West.” Then says, “Sanctions are a bit of a worry for people linked to certain regimes. You can minimise your exposure, but you can’t erase your past. The only thing you can do is pray you are not put on a list because family members will also be included.”

Bank account closures: Bank de-risking and wealth clients

I mention bank accounts with notifications of closure which seem irreversible even with lawyers involved. She agrees saying, “I have been trying to get bank accounts re opened for clients but less than a handful ever result in anything like a reversal. It’s usually temporary and short lived even if you don’t have a penalty from the regulator there is no legal remedy.” She continues, “There was a case where competition law was used to stop banks offloading entire sectors for instance money service businesses, but this is not helping now because banks have much more sophisticated risk systems and controls.”

New sanctions

Bradshaw adds, “There are different types of sanctions in Europe, and it depends on the severity of the breach. People think of the classic travel ban and asset freeze but when the Russian/Crimea conflict happened in 2014 we had a new concept of sectorial sanctions – capital market restrictions. Which Prohibit loans and dealings with securities. It is preventing State-owned countries from accessing capital markets.” A search shows that China has the largest amount of state enterprise assets in the world, with a more even sectoral distribution than other countries.

“One new area close to home, is legal advisory. You cannot give legal advice to a non-UK person, if the advice relates to the activity engaged in one of the other many sanctions against Russia. However, it hasn’t landed in the way expected. It’s completely disproportionate in its effect. You must read it ten times to understand it.”

UK legal advisory restrictions & Regulation 54D

“It’s a worrying development.” She says, “It’s the first time in history we’ve been told we can’t advise foreigners. Even if for a good cause. She cites the Regulation 54D Russia /EU exit regulation amendment adding, “A big portion of my clients are not individual lawyers now but law firms and barristers chambers – I train both and deal with day-to-day questions as they arise. The new regulation is incredibly complex and adding that lawyers are culturally risk adverse it means, if you are a lawyer and do something wrong, it could be the end of your career.”

Cyber risk for HNW and family offices: sanctions circumvention

“Sanctions evasion has also come to the fore. The mantra from the policy makers in the EU is that the reason sanctions don’t work is because they are being circumvented. But it’s not entirely true. They say its professional enablers like lawyers, but nothing is substantiated.” Bradshaw says there is confusion with grand corruption “which is an enormous problem – dictators will have a lawyer or accountant to hide their wealth, but they are isolated incidents.” Continuing, she says, “The Panama papers happened because of country legislation. So, this regulation is blaming professional services, but it should be aimed at legislation and governments.” She adds, “I think an added frustration now is a big shift to cybercrime.”

Banking de-risking, crypto and cyber: practical exposure

Bruce McDougall, Governance Director, Black Arrow Cyber Consulting agreed saying, “Sanctions frequently lead to a rise in cybercrime, as economic and other pressures push state actors and criminals to engage in illicit activities like cryptocurrency theft, fraud, and ransomware attacks to circumvent financial restrictions. Cryptocurrencies offer a way to evade sanctions, enabling criminals and sanctioned entities to transfer money outside traditional financial systems.”

Do sanctions work?

As to whether sanctions work, Bradshaw says, “Sanctions whether you like it or not are still imposed by individual countries or the EU. They don’t really fit together that well. It’s only a small proportion of countries that support Western economies that are ‘on message’. In those countries where sanctions don’t apply like Turkey, UAE and China. They will be ignored. Predictable but also lawful and completely fatal to the effect of sanctions.” Bradshaw says in a final comment, “There have been token moves in the EU and USA to block these countries, so Chinese companies are being added to sanctions lists and companies who are trading in battle components. The reason why they are on the list but not prosecuted is because its lawful activity which just undermines the key objectives of the sanctions.”

The US Perspective

Jacques Semmelman a former Assistant US Attorney in the Eastern District of New York and Commercial Litigation Partner at Katten Muchin Rosenman law firm in New York explains the US legal system. “While sanctions have been imposed to varying degrees on an array of countries, the two countries that are probably the most heavily sanctioned are Iran and Russia. Sanctions against Iran are different than those against Russia. No US person or company can engage in commercial activity with Iran (with some humanitarian exceptions). Iran is thus off limits to US companies, whereas Russia is not entirely off limits. There are restrictions on Russia, which have been augmented over time. They began in 2014 with Obama to address the Crimea situation, but the Ukrainian war has exacerbated sanctions regulation in significant ways. However, they are still not as comprehensive as the sanctions on Iran.”

Primary and Secondary sanctions

He continues, “Under US law, there are primary and secondary sanctions. Primary sanctions impose prohibitions on US persons and apply as well to non-US persons acting in or through the US.  For example, a non-US person who transacts in US dollars could be subject to primary sanctions.  A violator could face serious financial penalties, which in extreme cases have been in the billions of dollars.  These enormous penalties have been imposed in cases where bank employees processed a large number of transactions by falsifying records to conceal the involvement of a sanctioned country or person. Each transaction is a separate violation and penalty.  In addition to civil penalties, there can also be criminal charges.”  

Iran

 “Secondary sanctions are directed toward non-US persons, banks, and other companies, even in the absence of any link to the United States.  The person or entity that engages in prohibited conduct is put on a published list called the SDN List and is excluded from the US financial system.” 

Semmelman continues, “Iran has been a target of secondary sanctions for a long time.  As far back as 1996, secondary sanctions were starting to be imposed on Iran.  In 2010 the US enacted legislation known as CISADA, which expanded secondary sanctions against Iran. Since then, multiple pieces of legislation have been enacted against Iran, and the secondary sanctions are now quite extensive.  A difference with Russia is that, while there are some secondary sanctions against Russia, they are more limited. Russia sanctions are a patchwork. It’s easier to see what is prohibited under Iran sanctions than under Russia sanctions. Understanding whether a particular transaction is permitted will often require a fair amount of analysis.” He adds, sanctions vary by country because “the US government make its own determination on how it prioritises things like national security, international relations, and the economy.” He adds, “Crypto is another big problem.  It is a preferred tool of criminal money launderers. The US government is making efforts to reign that in.”

 Lawyers and ‘facilitation’

 “The US has a concept called facilitation, which restricts the ability of US lawyers when advising non-US clients about sanctions. For example, a non-US company in country X wants to do business with Iran.  The transaction is lawful under the laws of country X.  The non-US client seeks advice from a US lawyer to determine whether the transaction could subject the client to secondary sanctions under US law.  The US lawyer can tell the client whether the transaction falls within US secondary sanctions laws.  But even if it does not, the US lawyer – as a US person subject to primary sanctions – may not assist in the transaction in any way, including by drafting or reviewing deal documents.  It is not always clear exactly how far a lawyer can go. The published regulations and guidance are helpful but not complete.  Sometimes judgment calls will have to be made.   Sanctions laws are strict liability.  A good faith error can mitigate the penalty but is not a defence.  Most clients are risk averse.  No one wants to be penalized for violating sanctions.”

Indeed. The new landscape involves a conundrum of constantly changing sanctions laws and potentially grey areas and different ways to interpret them. As our specialists both Dr Anna Bradshaw and Jacques Semmelman say ‘intense analysis’ is the order of the day either by you or a team you hire to take care of it.