Organisations are being warned of the need to ensure that they keep abreast of changes to the sanctions regimes in the various jurisdictions in which they operate and to fully understand the links in their supply chains to avoid inadvertently breaching legislative requirements.

Peter van Veen, ICAEW’s Head of Corporate Governance, has emphasised the importance of due diligence and appropriate risk mitigation. However, he believes the ongoing evolution of sanctions across multiple jurisdictions and the increasing complexity of global supply chains mean that organisations could unwittingly find themselves in breach of sanctions rules.

Despite the macroeconomic challenges facing businesses, van Veen stresses that adherence to the sanctions regimes is crucial and investment is needed to ensure that adequate procedures are in place to do so. The potential economic and reputational risks of failing to abide by the rules are huge, he warns.

“The current sanctions regime is fluid. There are new regimes and territories being placed under sanctions, and ‘designated persons’ being added to and removed from the sanctions list all the time,” van Veen explains. The UK recently passed the Economic Crime (Transparency and Enforcement) Act 2022, which now allows the UK Government to create whole categories of persons as “designated persons” for the purposes of the sanctions regimes.

Sanctions do not only apply to potential or existing customers. They may also apply to potential or existing suppliers, business partners and associates acting on your behalf, regardless of their location. The difficulty is with the links in the chain, and the requirement in legislation to avoid dealing, directly or indirectly, with territories or persons that have been sanctioned.

“You need to know who you are dealing with, and who they might be dealing with. And that extends to understanding where the individual components that you use in your products come from,” van Veen says.

At the same time, extraterritorial rules are a particularly thorny issue, van Veen warns. “If you transact anything in US dollars, you are at risk of falling into the US sanctions regime, for example, even though no transactions took place in the US itself.” 

For larger organisations, use of third-party due diligence tools to monitor sanctions lists and combine with other risk alerts to provide early warning indicators is the only viable approach to managing what is a moving feast, van Veen warns. 

At the same time, risk management is also about having appropriate processes in place. “Don’t just rely on the procurement team or the sales team,” van Veen warns. “Make sure that the treasury function has full oversight of all contracts entered into and all transactions agreed to before the money either comes in or attempts to go out. The treasury department should have its own tools in place to block payments or stop money from coming in if a red flags pop up.”

However, the cost of these tools can be prohibitively expensive for SMEs. Specialist risk consultancies can provide due diligence reviews on a fixed-fee, per-entity basis, which may make their services accessible for SMEs, if only for doing due diligence on a few high-value and/or high-risk relationships. Otherwise, public databases exist but are hard to use unless you are familiar with how sanctions regimes work, because you have to know where to look. There are also multiple lists, depending on who’s imposing the sanctions, and some US states even impose their own sanctions, van Veen says. 

The questions organisations need to ask are: do you really know who the counterparty is? Who controls your counterparty? Where are they based or where do they conduct business? Are they or their Ultimate Beneficial Owner (UBO) on a sanctions list? Is it difficult to obtain basic information about them? 

Van Veen concedes that some companies will be reluctant to spend money mitigating some of these risks against a backdrop of cost pressures including rising interest rates and inflation, but doing deals without doing your homework can have financial, reputational and even legal ramifications. 

“Conducting proportionate due diligence should be seen as a standard cost of doing business and not an optional luxury. If you cannot afford the required due diligence to manage your risks, can you really afford to do business with that third party?” van Veen says.

However, van Veen is most concerned about companies that knowingly conduct business with sanctioned entities in the belief that they won’t be found it: “It’s a high-risk, short-term solution, because in the long term, the bill will be presented at some later stage if you’ve circumvented sanctions in the hope that no one will find out in. 

“There’s a big difference between taking a bit of risk commercially and turning a blind eye to things that you know are not okay or knowingly doing business with sanctioned entities. That’s more than taking a risk. That’s throwing caution to the wind and deliberately breaking the law,” van Veen says.

David Gomez, ICAEW’s Senior Ethics Lead, says the Economic Crime and Transparency Act has now introduced a regime of “strict liability” in the UK, in relation to breaches of financial sanctions. 

“OFSI no longer has to be satisfied that a person ‘knew’ or had ‘reasonable cause to suspect’ that their conduct breached a financial sanction or that they had failed to comply with their obligations under the sanctions regime,” Gomez explains. 

“Instead, OFSI will merely be required to determine whether, on the balance of probabilities, a breach or failure to comply with an obligation under sanctions legislation has occurred. The Act also provided OFSI with more extensive powers to ‘name and shame’ persons who it has found to have breached sanctions.” 

This combination of strict liability with potentially severe fines and the “name and shame” provisions with potential consequences for individual and corporate reputation should incentivise organisations to put in place appropriate processes and procedures to ensure compliance with sanctions legislation, Gomez warns.

• Read more: Latest Insights on sanctions