UN Issues Warning Against Over-compliance with Sanctions

The UN’s Special Rapporteur, Alena Douhan, has issued a stark warning on the consequences of over-compliance with sanctions. Douhan notes resorting to extreme measures to reduce legal, business, and regulatory risk has become tempting as governments issue more unilateral sanctions. 

Forms of over-compliance

Broadly, the UN defines over-compliance as “a form of excessive avoidance of risk.” While similar to the commonly discussed concept of de-risking, over-compliance is specific. The forms it can take include:

• Blocking all transactions with a sanctioned country, entity, or individual, “even when some transactions are authorized by humanitarian exemptions or fall outside the sanctions’ scope”
• Using complex documentation, higher charge rates/fees, and lengthy delays to discourage an authorized transaction
• Freezing assets not targeted by sanctions. Banks should be particularly mindful of this, as they could risk litigation if assets are frozen without due cause
• Denying individuals the ability to open a bank account or complete a transaction because they are nationals of a sanctioned country, even when they are refugees

Impact of over-compliance

Douhan argues that over-compliance leads to higher costs and delays in accessing humanitarian goods and services, including food, medicine, medical equipment, and spare parts. International organizations and NGOs are unable to pay employees operating in sanctioned countries. Individuals cannot access their properties, transfer money to/from their families, exercise business activities, and book flights/hotels.

The UN believes that, in some cases, over-compliance has prevented states, international organizations, and diplomats from participating in international fora. As a result, they “impede the normal functioning of diplomatic missions, missions of international organizations, and the implementation of humanitarian and development projects.”

Driving the “underground economy”

Douhan highlights the broader risk of a ‘shadow’ financial system emerging. Specifically, as firms and individuals look for ways to transfer money, the mechanisms of financial transactions become “opaque.” This drives an “underground economy” supported by smuggling, corruption, and other illicit activities. These can then spill into neighboring countries, even if they are not the subject of sanctions. 

Individuals may also seek to “escape poverty” through prostitution, drug trafficking, or “fall prey to powerful individuals who traffic them into criminal activities, for which, in turn, they are prosecuted and sanctioned, sometimes with death.” 

Recommendations for financial service providers 

The Special Rapporteur calls attention to the UN Guiding Principles for Business and Human Rights and General Commitment 24 of the Committee on Economic, Social and Cultural rights to help frame firms’ response to over-compliance risks.

She also lists ten key recommendations that compliance teams should review in full. They include guidance that firms should:

• Review their sanctions compliance policy to determine if the restrictions they impose on the provision of financial services are broader than those required by sanctions and to adjust their compliance to exclude any over-compliance to the extent possible
• Monitor the human rights impact of their sanctions compliance policy on an ongoing basis to eliminate, mitigate or prevent any harmful effect; due diligence relating to the human rights impact of over-compliance with sanctions is both an initial act and an ongoing process
• Provide for the free flow of payments for goods necessary to guarantee the basic needs of the population in targeted countries. These include medicines, medical equipment, raw materials, spare parts, food, seeds, fertilizers, electricity, water, housing, transportation systems, delivery of humanitarian aid and implementation of humanitarian and development projects.

Over-compliance and ongoing geopolitical conflicts 

The rise of the Taliban government in Afghanistan and the invasion of Ukraine have both called attention to the implementation of sanctions and the associated risks for vulnerable citizens. In September 2021, the US government directed financial institutions to continue processing personal remittances in Afghanistan to support the provision of humanitarian aid.

While the situation in Ukraine remains fast-moving, some analysts have argued firms worry about the impact of secondary sanctions. Primarily issued by the US, secondary sanctions impose additional pressure on firms outside the country’s jurisdiction. In her statement, Douhan wanted that secondary sanctions are illegal under international law. Technology firms such as Meta and pharmaceutical companies such as Pfizer have remained in Russia as they believe delivering their services is a moral imperative.