WHEN the EU agreed to place new names on its Russian sanctions list last week, it added to an ever-expanding and ever vaguer body of international rules for compliance officials to navigate. While Russia’s finance minister has warned that sanctions are costing his country $40bn (£25.5bn) a year, they also pose significant challenges to businesses in the West. Indeed, several investment banks have privately claimed that sanctions against Russia are the biggest compliance risk to their operations in the medium term, ahead of money laundering and terrorist financing.
The core trait of all sanctions is that they are inevitably political and so certainty will always be difficult to find. The balancing of national self-interest against international responsibilities and relationships means that consistency in levying and enforcing sanctions will remain elusive. Given this, it should come as no surprise that not all sanctions are based on sound pragmatism. Witness the reactionary sanctions imposed by Vladimir Putin on senior US political figures this year, or older blanket embargoes, like the nearly 60 year old sanctions on Cuba, which have become increasingly difficult to fathom.
Further complication is added by discrepancies between the implementation and enforcement activities of the US and EU. In the case of US sanctions, the process is far more streamlined and is primarily authorised under presidential executive orders. While subject to judicial and legislative review, these orders are about as close to monarchical powers as you can get in a modern democracy. The European process, meanwhile, appears to be like trying to herd cats.
Crucially, the simplified US model increases the speed and aggressiveness of enforcement. If compliance teams check only one sanctioning body, it will always be the US. Yet given the threat of US penalties, like the record $9bn fine levied on BNP Paribas for sanctions violations, this effectiveness has left some European and Asian banks fearful.
In contrast, the EU sanctions process is far more complicated. This is in no small part due to the difficulty of obtaining consensus within a 28-nation bloc, even in the case of Russia. Governments in some member states also publish their own independent sanctions lists, like the UK’s consolidated list of financial sanctions targets. This provides added levels of complexity in determining compliance with existing regulations, and leaves EU sanctions at greater risk of judicial challenges from within the EU, diminishing their effectiveness. Further, lack of consensus weakens the EU’s overall ability to enforce sanctions, as was glaringly exposed during combative negotiations last year, when the UK and France sought to effectively overrule the European embargo on sending arms to Syrian rebels.
Businesses, then, are left to calculate the associated risks of compliance with multiple sets of sanctions against the likelihood and scale of potential penalties. To complicate matters further, the newly-passed Ukraine Freedom Support Act broadens unilateral US enforcement authority against “foreign financial institutions”. The legislation dramatically expands the list of institutions subject to US sanctions to include those “work[ing] with” and not directly in the American banking system.
However, despite the panic, all is not lost. While previous international sanctions and embargoes have been unimaginably disjointed, Ukraine-related sanctions have proven far more coordinated and coherent. This should provide western businesses with a shred of hope that similar international sanctions regimes in the future may be far easier to both anticipate and react to. Indeed, this year’s 20 rounds of successive sanctions against Russia have so far resulted in fewer penalties levied when compared to similar international sanctions processes. Since 2009, the seven largest sanctions-related fines, all from the US, have overwhelmingly involved Iran or Cuba, and there have been more Syrian sanction penalties than Ukraine-related penalties over a similar period of time.
There have been other promising developments. While the gap between the US and EU in the breadth and severity of sanctions imposed on countries like Iran, Syria and Cuba has historically been very noticeable, we have seen a relatively unified effort against Russia. The true test of this bilateral effort will be in the actions taken by the US and EU after the recent G20 summit, where further sanctions were threatened.
For western businesses, the model of the sanctions imposed on Russia could potentially represent a shift towards a future where the sanctions landscape is easier to navigate. While consensus across all potential sanctions is likely to be impossible, if such bilateral efforts can rise above national agendas in similar situations in the future, the web of competing sanctions could be significantly reduced.