What will sanctions regimes look like in 2022 and what level of divergence is to be expected?
How can multinational firms ensure all applicable requirements are followed, while continuing to balance the various conflicts presented by blocking regulations?
2021 saw governments around the world continue to turn to financial sanctions as their “go to” method of effecting foreign policy change.
New players such as China, Ukraine and Russia issued their own sanctions or expanded on their prior regimes. This created challenges, particularly for compliance departments, as they struggled to stay ahead of this ever-changing landscape.
The Biden Administration focused on reviewing sanctions, issuing a report in October 2021. The US Department of the Treasury’s report didn’t surprise many. It flagged the challenges presented by digital currencies and alternative payment platforms to the efficacy of US sanctions programs, which are largely based on the use of US financial institutions and US dollars. It indicated that, in order to ensure the effectiveness of US sanctions, the US must target its sanctions to minimize unintended consequences and continue to focus on permitting humanitarian activities; implementing agencies should improve communications about what sanctions are and their effects so as to foster better compliance; and sanctions should be implemented pursuant to a “structured policy framework” so that there is a clear link between the sanctions and the articulated policy objective. Importantly, the report also reinforced the need for multilateral coordination in order for sanctions to be most impactful and effective.
We have already seen a significant uptick in the use of sanctions to counter human rights abuses, corruption, and anti-democratic activities globally, with country level sanctions becoming less common and list-based sanctions gaining increased utility. The US has sought to gain the participation of its allies, particularly coordinating with several countries concerning implementation of “Magnitsky” sanctions.
We have already seen a significant uptick in the use of sanctions to counter human rights abuses, corruption, and anti-democratic activities globally
There has also been coordination concerning implementation of sanctions against Belarus, Russia and others. In addition, the Biden Administration has taken into consideration European interests, waiving sanctions with respect to entities involved in Russia's gas pipeline to Germany and consulting with EU governments concerning potential next steps should Russia invade Ukraine. The difficulty for compliance teams is where different regimes are implemented as a result of such coordination. With respect to Belarus, for instance, coordination resulted in sanctions being introduced near in time, but not necessarily targeting all of the same parties. These divergences create compliance challenges and efficacy concerns for global firms. From a US sanctions perspective, we are likely to see these issues continue, notwithstanding the ambitions for change set forth in the sanctions review report.
While many of the regimes enacted post-Brexit closely mirror the substance of the prior EU regimes, 2021 saw the UK start to take advantage of the new flexibility and powers available to it under its domestic legislation, as it resumed responsibility for administering its own autonomous sanctions regime. A number of new regimes were implemented at speed, including before equivalent regimes were issued by other jurisdictions such as the EU, and following coordination with a range of new strategic partners, such as Canada.
As those versed in compliance will know, this newfound flexibility has come at a price and with a number of real-world knock-on effects, the main one being divergence between regimes. Sanctions are clearly more effective when implemented on a multilateral basis; alignment reduces the compliance burden and thereby increases the likelihood of sanctions measures being effective. However, as the director of the UK’s Office of Financial Sanctions Implementation (“OFSI”) has made clear, such alignment cannot necessarily be counted on going forward and divergence will be the result where the UK’s interests diverge from those of its partners.
Unfortunately, it seems divergence is likely only to continue in 2022. While the UK has stated its intention to continue to coordinate with both the US and EU on sanctions policy, it seems unlikely the UK will be able to continue to please and align with both. As noted above, a key concern will be that 2022 may potentially see divergence between the EU and US’ policy positions regarding Russia and Ukraine. In such a situation, the UK may find itself caught in the middle. It will have to pick a team. In addition, minor areas of divergence between specific regimes, such as in relation to designated persons, are likely only to multiply. The compliance challenge therefore looks set to increase in 2022.
To mitigate some of these challenges firms should: • Continually review and update their sanctions policies and internal guidance • Monitor developments carefully and • Use external expertise where necessary
Given the developments in the US, UK and elsewhere in 2021, it is likely that we will see more coordination regarding sanctions use on a macro scale. But the devil is in the detail. We predict we’ll see differences in the particular sanctions regimes implemented and the entities designated under them. This will result in ongoing compliance challenges for multinational firms to ensure all applicable requirements are followed, while also continuing to balance the various conflicts presented by blocking regulations.
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This document provides a general summary and is for information/educational purposes only. It is not intended to be comprehensive, nor does it constitute legal advice. Specific legal advice should always be sought before taking or refraining from taking any action.