On 24 February 2022, Russia invaded Ukraine, and sanctions compliance around the globe would never be the same again. This major escalation of a conflict that started in 2014 – known as the Russo-Ukrainian War – continues to have many unanticipated consequences, in terms of economics, supply chains, energy and more. And of course, the conflict is having a seismic impact on sanctions regimes, and on the compliance demands placed on financial services firms, companies, and the regulators that oversee these programmes.
Sanction numbers soar
Perhaps the most obvious impact is the steep acceleration in sanctions issuance around the globe. Just for the Russo-Ukrainian War, between February 12, 2022, and January 12, 2023, sanctions have been applied to:
- 8,984 individuals
- 1,811 entities
- 92 vessels
- 14 aircraft
by Australia, Canada, the European Union (EU), France, Japan, Switzerland, the United Kingdom (UK), and the United States, according to Statista.[i] For example, in the calendar year 2022:
- the US issued sanctions against approximately 1,716 individuals and entities
- the EU sanctioned 1,386 individuals and 171 entities
- U.K. 1,463 sanctioned individuals and 162 entities
These are unprecedented rates of sanctions creation, and new sanctions continue to be published. For example, in early February 2023, the UK announced sanctions on six companies supplying Russia’s military defence, as well as on eight individuals and one entity. Similar sanctions followed from the EU, which says it is imposing new sanctions worth €11 billion. Experts predict the pace of sanctions is set to continue. And of course, with each new sanction, financial firms and in-scope companies need to review existing relationships and transactions as well as set up a screening of new transactions and relationships.
Sanctions enforcement grows stronger
Another high-impact change is the increase in the enforcement of sanctions around the globe. In the US, enforcement is very strong – the US’s Office of Foreign Assets Control (OFAC) levied $42.7 million in penalties and settlements in 2022 alone. Robust enforcement continuing in 2023, with a 7.7% hike in the size of fines that can be imposed. In June 2022 in the UK, the Office for Financial Sanctions Implementation (OFSI) became able to impose a monetary penalty on a company or individual regardless of what the individual’s intent or knowledge around a sanctions breach is. Too, after criticism by MPs about the lack of issuance of fines, it’s likely that the UK OSFI will start dishing out more. And in December 2022, the EU proposed a directive that will create minimum rules around the definitions of criminal offences and penalties for the violation of EU sanctions, to create more harmonisation across the EU for sanctions enforcement.
Sanctions broaden as well as deepen
There have been other substantial changes, too. In the past, sanctions were usually a list of names of individuals and entities. Today, more sweeping sanctions have been put in place that prohibit certain industries and services – such as types of technology, management consultancy, and accounting – from engaging in certain jurisdictions. These broader sanction types can be more challenging for financial firms and companies to screen for. Also, a wider range of company types is now having to perform sanctions screening, creating increasing compliance risk for them. For example, cryptocurrency companies in many jurisdictions are now having to enforce sanctions, after concerns were raised that sanctioned jurisdictions were using cryptocurrency to circumvent sanction rules.
Managing regulatory change
All of this change is creating significant challenges for companies and firms. For example, financial services regulators – who over the past few years have become increasingly data and technology savvy – are making it clear that they now have an expectation of speed to compliance. When a new sanction is introduced, these regulators are expecting financial firms to be able to implement it quickly and effectively, as they know the technology exists to enable them to do so – whether the financial firms have it in place or not.
Indeed, many firms with legacy sanctions screening software and manual processes are struggling to keep up with the pace of recent regulatory change. They are finding it challenging to implement the sanctions at the speed that sanctions and financial regulators want to see. And with increased enforcement, companies and firms know they are putting themselves at risk for penalties, reputational damage and more.
Moreover, companies and firms that are struggling with outdated software and manual processes are finding that their compliance costs are escalating at an uncomfortable rate. In the Netherlands, it’s estimated that anti-money laundering checks, which include sanctions screening, are costing the industry €700 million per year. So, big banks such as ABN Amro, ING and SNS have said they are introducing a monthly fee to help recover this expense –unsurprisingly, the additional charges were badly received in the Netherlands.[ii]
So, after more than a year of tremendous change, financial firms and companies are facing a real choice about how to move forward so that they are able to meet the current sanctions challenges and others that will undoubtedly be in the future. Certainly, improved technology that can reduce costly false positives, enhance efficiency, and improve the speed of regulatory change is one option that should be considered.