In recent weeks the European Union has imposed sanctions against more than 100 individuals and entities involved in the conflict. In addition, it has imposed restrictions on financial transactions with Russian state banks, and there are trade restrictions in place affecting certain sectors. In recent years, we have seen more instances of sanctions against individuals, entities and countries worldwide, which did not always receive much attention. Beyond sanctions against terrorists and their organisations, they were aimed at countering the trade in certain goods, or at individuals from conflict areas in Africa, or dictatorships.
Sanctions are political instruments in the foreign and security policies of the European Union. They are enforcement instruments employed in response to violations of international law or human rights, or to encourage policy changes where legal or democratic principles are being violated.
Sanctions also are a strong weapon in the combat against terrorism. While the freezing of terrorists’ financial assets does not make it impossible to prepare or carry out terrorist attacks, a freeze does make make it more difficult to do so.
The most common sanctions include arms embargos and trade restrictions, travel and visa restrictions and financial sanctions. Broadly speaking, we can distinguish between two types of financial sanctions: orders to freeze financial assets and bans on the provision of financial services, including payments, trade finance, transport insurance, but also the management of target companies by trust offices.
How do financial institutions monitor compliance?
The universe of those who must comply with sanctions is very broad and includes financial institutions. Non-compliance with sanctions constitutes an economic offence. Financial institutions act as gatekeepers, i.e. their role is to identify ‘undesirable elements’ in our financial system and keep them out where necessary, and to prevent undesirable transactions. Legislation to promote integrity and combat terrorism and money laundering requires banks to know their customers.
Following the introduction of new or amended sanctions, financial institutions must determine whether their customers include individuals, companies or entities that are covered by these sanctions. In addition, they must check whether their services could potentially play a role in carrying out or facilitating prohibited transactions, and end any involvement in such transactions. This means that they must take immediate action if they are involved. What such action exactly entails depends on the nature of the financial institution’s services and the details of the sanctions regulation. Action could include freezing money in bank accounts, blocking insurance or pension policies or terminating trade credits. The financial institution concerned must notify DNB without delay about for example a freezing of assets.
Financial institutions’ responsibilities go beyond mere checks against the published names on sanctions lists. They have to make every effort to identify a customer’s ultimate beneficial owner (UBO), who may be hidden behind companies, foundations or individuals. It is therefore essential that financial institutions know at all times who their customers actually are, which is also a legal requirement. In addition, financial institutions have to examine the financial relationships of their customers and check them against the sanctions lists. The purpose of these requirements is to prevent financial institutions from taking part – in any shape or form – in prohibited transactions.
Supervision of compliance with the Sanctions Act
DNB and the Netherlands Authority for the Financial Markets (AFM) are responsible for supervising the financial sector’s compliance with the Sanctions Act. Their focus is on the effectiveness of financial institutions’ procedures and measures aimed at ensuring compliance with sanctions. Non-compliance may prompt DNB or the AFM to impose a cease and desist order under penalty or an administrative fine on an institution. They can also report a criminal offence to the competent authorities. Notifications received under the Sanctions Act are assessed by DNB and the AFM, and notifications of transactions or intended transactions that contravene sanctions are forwarded to the Ministry of Finance. If necessary, notifications will also be subject to further examination.