Navigating the complex world of sanctions: A comprehensive guide for politically exposed persons and businesses

In today's global economy, understanding sanctions and their implications is crucial, especially for politically exposed persons (PEPs) and businesses dealing with international transactions. This guide will explore the intricacies of sanctions, including how they apply to PEPs, and the importance of conducting thorough PEP and sanctions checks.

Understanding Politically Exposed Persons (PEPs)

A politically exposed person is an individual who holds a prominent public position or has close ties to someone in such a position. The definition of a politically exposed person typically includes:

• Government officials
• Senior politicians
• Judicial figures
• Military leaders
• Executives of state-owned enterprises
• Family members and close associates of the above

Maintaining an up-to-date politically exposed persons list is essential for businesses to comply with sanctions and anti-money laundering regulations.

What are sanctions?

Sanctions are economic restrictions imposed by governments and international organisations to address violations of international law, human rights abuses, and state-sponsored crimes. Sanctions are crucial to AML programmes as they help prevent financial fraud and ensure compliance with AML/CTF laws and regulations.

These sanctions, which include financial restrictions and prohibitions, are tools used to apply economic pressure and achieve foreign policy goals. Measures such as trade bans, investment restrictions, asset freezes, and travel prohibitions are imposed to manage geopolitical conflicts and mitigate military interventions.

Who do sanctions apply to?

The simple answer is that sanctions regulations apply to all individuals and businesses located in the sanction-issuing country. These include:

1. Individuals and businesses in the sanction-issuing country
2. Foreign nationals with ties to the issuing country
3. Entities incorporated under the issuing country's laws
4. Companies transacting through the issuing country's financial system

It's important to note that sanctions can have extraterritorial reach, affecting entities in other countries that do business with sanctioned parties. This is where PEP and sanctions screening becomes crucial for businesses operating internationally.

Let’s take the example of the United Kingdom. In the UK, sanctions apply to all UK nationals, foreign UK nationals not residing in the UK, and any entities incorporated or constituted under UK law. In addition, entities that transact via the UK financial system or in British pounds may also submit to the UK sanctions regime.

There is another layer of complexity involved in the application of sanctions. It's easy to think only businesses located in the country issuing the sanctions need to abide by them i.e. why would U.S. sanctions matter to a rural real estate agency in New Zealand or a small casino in Australia?

The answer is a lot more complex. To ensure effectiveness, governments may impose sanctions not only on those within their own borders but also on entities in other countries that do business with sanctioned parties - this is known as ‘extraterritorial’ sanctions.

This enforcement approach includes primary and secondary sanctions. Entities working with foreign customers, clients, partners, or suppliers need to understand these sanctions and how to comply with them.

Types of sanctions and their impact on PEPs

Primary sanctions

Primary sanctions are economic restrictions that individuals and businesses within a specific country must follow. These sanctions are enforced by government agencies responsible for sanctions and enforcements e.g. United States Office of Foreign Assets Control (OFAC).

For example, OFAC implements primary sanctions targeting countries, organisations, and individuals deemed to be involved in international crimes or pose threats to U.S. national security (current OFAC targets include North Korea, Russia, Cuba, Iran, Syria, and certain Chinese entities). PEPs from sanctioned countries or regions may find themselves subject to these restrictions.

Primary sanctions come in various forms:

• List-Based Blocking Sanctions: Prevent U.S. transactions with entities on OFAC's Specially Designated Nationals (SDN) list.
• Comprehensive Sanctions: Target entire countries or regions.
• Targeted Sanctions: Focus on specific individuals.

Secondary sanctions

Secondary sanctions are economic restrictions imposed on foreign companies or individuals that do business with those under primary sanctions. Secondary sanctions are imposed to increase the impact of primary sanctions. For politically exposed persons, this means their business activities could be scrutinised even if they're not directly subject to primary sanctions.

To put this into perspective, if a company in Switzerland helps North Korea launder money, it breaches U.S. secondary sanctions. The U.S. Treasury can consequently ban said Swiss company from using the U.S. financial system and trading with U.S. banks.

Compliance with both primary and secondary sanctions is crucial for reporting entities, particularly with foreign clients or transactions. While most reporting entities will screen customers against primary sanctions lists, compliance with secondary sanctions requires broader international screening. For instance, UK firms doing business with both U.S. and Chinese clients must screen against both the UK Sanctions List and the OFAC Sanctions List to avoid violating U.S. restrictions.

The importance of PEP and sanctions checks

Conducting thorough PEP and sanctions checks is crucial for businesses to avoid violating international regulations. This process involves:

1. Screening customers against primary sanctions lists
2. Performing PEP and sanctions screening on international clients
3. Regularly updating the politically exposed people list used for screening
4. Conducting ongoing PEP and sanction checking to maintain compliance

By implementing robust PEPs and sanctions checks, businesses can mitigate risks associated with dealing with politically exposed persons and ensure compliance with both primary and secondary sanctions.

Conclusion

Navigating the complex world of sanctions and politically exposed persons requires diligence and ongoing attention. By understanding the definition of politically exposed persons, maintaining an accurate PEP list, and conducting regular PEP and sanctions screening, businesses can protect themselves from potential legal and financial repercussions while operating in the global marketplace.