Meeting the requirements of the various sanctions regimes is one of the great challenges for FIs operating in an incredibly diverse, complex and fluid international financial ecosystem. The primary sanctions regime of concern for most is the United States, implemented and overseen by the Office of Foreign Assets Control (OFAC) within the US Department of Treasury. Other countries, such as the UK and Australia, maintain their own sanctions lists, as do international organizations, such as the United Nations (UN) and the European Union (EU). Western countries and organizations have tended to focus their sanctions on similar targets, especially around perceived shared threats from weapons proliferation and international terrorism, but there are signs that these regimes may become increasingly divergent.
The most precarious situation remains that of Iran, subject to UN and western sanctions primarily (but not exclusively) because of the regime’s nuclear weapons and ballistic missiles programs. In 2015, Iran, with the US, China, Russia, the UK, Germany, France and the EU, negotiated a Joint Comprehensive Plan of Action (JCPOA) to ease sanctions against Iranian oil, shipping and banking in return for limitations on the Iranian nuclear program. However, in May 2018, the US withdrew from the agreement and, in November 2018, reimposed nuclear-related sanctions. Despite the continued support of the other signatories for the JCPOA, the reimposition of US sanctions has severely undermined the Iranian economy, where oil rationing sparked a wave of protests across the country in November 2019. Military tensions also rose in the Persian Gulf during the summer due to a number of Iranian provocations, including the downing of a US drone and the quarantine of a UK oil tanker.
Tensions also remain high with North Korea. The February 2019 Hanoi summit between US President Donald J. Trump and North Korea’s Chairman Kim Jong-un did not result in North Korean denuclearization, and despite the resumption of “working level” talks on October 5, little material progress appears to have been made. This might change in 2020, with the possible “wild card” of President Trump pushing for face-to-face talks to generate a breakthrough in his re-election year. However, on the balance of discussions so far, such a breakthrough seems unlikely.
A tool of first resort
Since 9/11, the US has increasingly used sanctions as a major national security tool, but under President Trump, they have increasingly become a tool of “first resort,” as the administration — largely supported, encouraged and sometimes led by Congress — has shown a marked preference for economic over military forms of coercion. In response to Iranian actions in the Persian Gulf, for example, the US chose to designate members of the Iranian leadership in June rather than use military force. Besides the Iranian crisis, the US has also expanded or enabled sanctions against:
- The regime of Nicolas Maduro of Venezuela;
- Chinese companies linked to alleged human rights violations in China’s Xinjiang province;
- Chinese and Hong Kong officials deemed responsible for human rights violations in the current disturbances in Hong Kong; and
- Russian entities and individuals over their involvement in attacks against Ukraine, a nerve agent attack against a former spy in Salisbury, attempts to sidestep sanctions against Venezuela and interference with the 2018 midterm elections, among other actions.
Potential areas of further action in 2020 will be US sanctions against Turkey for its purchase of Russian military equipment and against Russian businesses, individuals and projects linked to potential tampering with the US presidential elections in November 2020. The US is also likely to expand its range of designation options into the VA space. In November 2018, OFAC designated two Bitcoin digital wallets linked to alleged Iranian sanctions evasion, and although 2019 was a relatively quiet year in this regard, the growing use of VAs by Iranians, Venezuelans and North Koreans is likely to make them a targeted asset again in 2020. Indeed, the growing potential importance of VAs to North Korea was highlighted in December 2019, when US authorities arrested cryptocurrency expert, Virgil Griffith, for advising the regime in Pyongyang on how VAs could be used to circumvent sanctions. The North Korean regime is also reported to be planning the development of its own government-backed cryptocurrency.
US Diverging From the Rest?
Although the EU and other western states have not always followed exactly the same path as the US, their respective regimes have been close enough to indicate a “family resemblance.” Nonetheless, there have always been some variations in approach. Unlike other regimes, the US also makes significant use of extraterritorial secondary sanctions, meaning that non-US parties doing business with the targeted entities are also subject to enforcement action. This has long been a point of friction with other countries with regard to Iran, from whom so many have historically bought oil. Until recently, the US has managed to live with this, taking a pragmatic approach to the workarounds other friendly or powerful countries have found to tackle secondary sanctions, such as the parallel financial payments system that China set up to Iran during the Obama administration. But the US’s increasing toughness is making accommodation more difficult and will add to the long-term pressure towards the development of a fully-fledged alternative “non-dollar” global financial system, most likely overseen by China. This will not come in 2020, but if economic and political tensions between the US and China continue as they are, there is an increasing likelihood it eventually will.
A key element in whether this comes sooner rather than later will be the attitude of the EU. Its reaction towards the US’s withdrawal from the JCPOA may prove to be a harbinger of a more distinctive approach; although focused on humanitarian trade allowed by US sanctions, the EU and the national governments of Germany, France and the UK have sought to find ways redolent of the Chinese approach to work around the US. Throughout 2019, the European parties have developed a special purpose vehicle (SPV), “The Instrument to Support Trade Exchanges,” or INSTEX, to undertake non-US dollar trade with Iran. China has also expressed interest in involvement, and if successful, such options will provide Europeans and other countries methods for defying US policy. This will, in turn, put the unity of the international financial system under serious strain if political disagreements persist.
What does this mean for your business?
- Compliance professionals will need to keep a close watch on the imposition of new US sanctions linked to key geopolitical hotspots — Iran, North Korea, Venezuela, China, Russia and Turkey — in 2020. Those in the VA sector will need to keep a particularly close eye on potential designations.
- Non-US firms will need to pay particular attention to the impact of secondary sanctions, especially on Iran, and the potentially differing responses of other major global players, such as the EU.
- In light of the speed of change in sanctions regimes, having an agile, automated solution that offers real-time screening will be ever more important.
- Increasing regulatory divergence will mean having a sanctions screening solution that monitors not only a select few top sanctions lists but all lists, national and international, will be crucial.
This blog is an excerpt from the 2020 Global Compliance Report. Click here to read the full report.