Sanctions: Five things you should know this month

1. UK Guidance on financial sanctions post-Brexit

On February 1, 2019, the Office of Financial Sanctions Implementation (OFSI) published general guidance on financial sanctions for when the UK leaves the EU. The guidance refers to the Sanctions and Anti-Money Laundering Act 2018 (SAMLA), which enables sanctions to continue uninterrupted post-Brexit. Statutory instruments (SIs) under SAMLA will transfer existing EU sanctions into English law. The SIs will come into force on Exit Day in the event of a no-deal Brexit.

To facilitate implementation, on January 31, 2019, the Foreign and Commonwealth Office (FCO) published statutory guidance on the sanctions regimes in relation to Burma; Iran (Human Rights); and Venezuela. The related regulations impose financial, trade and travel sanctions to encourage compliance with international human rights law and respect for human rights, and to respect democratic principles and the rule of law.

In addition, if there is a no-deal Brexit the FCO’s technical guidance states that those required to comply with UK sanctions should

• Refer to SAMLA and SIs made under it.
• If no SI has been made for the sanctions regime in question, refer to any EU Council Regulations retained under the EU Withdrawal Act 2018.
• Not assume that all aspects of existing EU sanctions will be replicated exactly but check new legislation and guidance to ensure compliance.
• Check that UK SIs contain relevant exemptions to cover activity which is currently exempt from EU sanctions.
• The FCO is expected to publish further guidance in the event of a no-deal Brexit.

2. France, Germany and UK launch INSTEX to facilitate European trade with Iran

In a joint statement on January 31, 2019, France, Germany and the UK (together, E3) announced the creation of a payment channel special purpose vehicle (Instrument in Support of Trade Exchanges or INSTEX) to offer European companies a settlement option in relation to their Iranian business activities.

INSTEX aims to facilitate legitimate trade between European companies and Iran, focusing initially on sectors such as pharmaceutical, medical devices and agri-food goods. INSTEX forms parts of the EU's response to the US withdrawal from the Joint Comprehensive Plan of Action (JCPOA) with Iran, in addition to the extension of Council Regulation (EC) No 2271/96 (commonly known as the EU Blocking Regulation) in August last year. INSTEX has been registered in France, will be run by German banks, and will be open to registered European companies that opt to use the system. The specific timing to implement INSTEX remains uncertain.

This latest initiative by the E3 has reaffirmed efforts to uphold their commitments under the JCPOA. However, questions will likely be raised for EU companies considering Iranian business via INSTEX in light of the on-going potential risks under US secondary sanctions. The US secondary sanctions on Iran were reinstated in November 2018, following the US withdrawal from the JCPOA, and remain a risk for EU companies doing business with Iran. The US secondary sanctions include the US preserving the right to designate non-US persons (e.g. EU companies) for any "significant" business activities with Iranian counterparties even where there is no US nexus, and may result in being excluded from the US financial system or doing business with US companies.

3. Lifting of US sanctions against Rusal, En+ and JSC EuroSibEnergo

The US Office for Foreign Assets Control (OFAC) announced on January 27, 2019 that it had lifted sanctions imposed on United Company Rusal plc (Rusal), En+ Group plc (En+) and JSC EuroSibEnergo (ESE).

These entities had been designated and listed on OFAC’s Specially Designated National and Blocked Persons list (SDN List) for being owned or controlled, directly or indirectly, by Oleg Deripaska, a Russian oligarch designated as an SDN on 6 April 2018. Rusal’s position as the second largest aluminium producer in the world meant that these designations had a significant impact on the global aluminium markets. Following the April 6 designations, En+, Rusal and ESE petitioned OFAC for de-listing and have since engaged in an extended period of negotiation with OFAC.

Following these negotiations, on December 19, 2018, OFAC notified the US Congress of its intention to terminate sanctions imposed on En+, Rusal and ESE, following 30 days of Congressional review. In return, the three entities agreed to

• Undertake “significant restructuring and corporate governance changes”, including reducing Oleg Deripaska’s direct and indirect shareholding to below 50 percent.
• Assign voting rights of shares tied to Oleg Deripaska to an independent third party.
• Overhaul the composition of their boards of directors, with a majority of independent directors.
• Agree to “unprecedented level of transparency” by undertaking extensive, ongoing auditing, certification, and reporting requirements.

During the period of Congressional review, the US House of Representatives passed a resolution rejecting the de-listing; however, a similar resolution failed to pass the Senate, enabling OFAC to proceed with terminating the sanctions on January 27, 2019.

Oleg Deripaska continues to be listed on OFAC’s SDN List, meaning that his property and interests in property remain blocked under the US sanctions regime.

4. Venezuela EOs and PdVSA designation

• On January 28, 2019, OFAC added Petróleos de Venezuela, S.A. (PdVSA), Venezuela’s state-owned oil company and a primary source of the country’s income and foreign currency, to the SDN List pursuant to Executive Order (E.O.) 13850. This designation comes as Venezuela is mired in political upheaval, with Nicolás Maduro, who was re-elected in a contested election in May 2018, and opposition leader Juan Guaidó claiming to be the legitimate President of Venezuela. The United States and many European countries, including the United Kingdom, Spain, France, Germany, Sweden and Denmark have officially recognized Guaidó as Venezuela’s Interim President, with the United States calling Maduro’s claim to the presidency “illegimate”.
• As a result of PdVSA’s designation, US persons are generally prohibited from engaging in any transactions with any property or interests in property held by PdVSA as well as those working on behalf of PdVSA or entities owned 50 per cent or more by PdVSA. In addition, under E.O. 18350, PdVSA’s designation creates increased risk for non-US entities that continue to do business with PdVSA, even where the non-US entity’s activities or transactions with PdVSA have no US nexus. OFAC has issued an assortment of general licenses and guidance in conjunction with PdVSA’s designation, which allow for certain wind-down operations and create carve-outs for variously-situated entities and individuals engaged in business with PdVSA and its various subsidiaries.
• Our full briefing on the designation and its impacts for US and non-US entities can be found here.

5. The Wolfsberg Group publishes Guidance on Sanctions Screening for financial institutions

On January 21, 2019, the Wolfsberg Group – an association of 13 global banks which aims to develop frameworks and guidance for the management of financial crime risks – published new guidance on how financial institutions (FIs) should carry out sanctions screening.

The paper’s objective is to provide guidance to FIs as they assess the effectiveness of their sanctions screening controls, whether automated, manual or both. It notes that most FIs deploy two main screening controls designed to identify sanctions targets: transaction screening; and customer screening. All FIs should identify and assess the sanctions risk to which they are exposed and implement a sanctions screening programme commensurate with their nature, size and complexity. Other key themes from the guidance include

• FIs should seek to adopt a risk based approach to sanctions screening and consider all aspects of a comprehensive sanctions screening control framework.
• While sanctions screening is a primary control, it has its limitations and should be deployed alongside a broader set of non-screening controls and wider effective financial crime compliance programme, to assist with the identification of sanctioned individuals and organisations.
• It is important to have a clear strategy with respect to sanctions screening to mitigate the risk of being exposed to sanctioned parties and countries.
• It is imperative for FI’s to document their systematic approach to screening and link it directly to the FI’s risk appetite statements.
• Technology remains a key enabler of the effectiveness of identifying financial crime risk through screening, making the process more efficient and on a real-time basis. The accuracy and completeness of the FI’s own data is central to an effective and efficient sanctions screening process.
• The FI should ensure the people involved in the end-to-end sanctions screening processes are robustly trained and supervised that strong management information should be made available to assess the effectiveness of sanctions screening control.
• Robust management information should be made available to management to report effectiveness, trends and performance of the sanctions screening programme.

The Wolfsberg Group does not advocate that FIs simply adopt its guidance, but each FI should consider the risks described, the applicable regulatory standards and their own defined risk management strategy.