IMPLICIT / EXPLICIT sanctions – beware of the difference they may be more than 50%?

IMPLICIT / EXPLICIT sanctions – beware of the difference they may be more than 50%?

In their simplest form, sanctions are political trade tools put in place against targeted countries, individuals or entities with the goal to maintain or restore peace and security. Their purpose is to change the behaviour of the targeted country/individual/entity’s regime or direction with the aim to improve outcomes or stop certain activities.

A sanction can be explicit or implicit.

• Explicit sanctions detail the specific names of a country/individual/entity.
• Implicit sanctions are more narrative in nature and can be harder to manage, such as statements on a sanctions programme or a sanctioned entity without any specific names to screen against.

Implicit sanctions don’t specifically name an individual or company (other than the main sanctioned entity) but extend to entities covered by a narrative statement on a sanctions program.

Implicit sanctions apply when a sanctions order, listing, or regulation extends sanctions to an entity or individual not sanctioned by name via a narrative statement.

A classic example of this is the OFAC 50% rule, which applies to EU, UN, and Russian sanctions.

This rule states that any entity owned 50% or more by a sanctioned individual or entity is itself considered sanctioned, even if it’s not explicitly named on the sanctions list. This is an example of an implicit sanction because it’s not directly stated but is implied by the ownership relationship. Also the UK & EU also has a 50 percent rule, but it differs slightly from the OFAC version, adding additional layers of complexity.

The OFAC 50% rule and the UK and EU sanctions rules are similar in that they extend sanctions to entities owned by sanctioned individuals or entities. However, there are some key differences:

OFAC 50% Rule: The U.S. has long maintained a “50% rule” in applying sanctions to non-listed entities held by sanctioned parties. This is a relatively straightforward criterion based solely on ownership. If a sanctioned person owns 50% or more of a legal entity, that entity will be considered a sanctioned business.

UK and EU Sanctions Rules: The UK and EU blocking sanctions apply where there is either ownership or control. An entity falls under the sanctions when over 50% of it is owned, directly or indirectly, by a person listed by one of their jurisdictions. Thus, in contrast to the U.S., a 50-50 joint venture with a listed person is not automatically subject to sanctions. The UK legislation gives the Government new powers to control how broadly asset freezes are to be applied and to prevent circumvention.

In summary, while the OFAC 50% rule is based solely on ownership, the UK and EU rules consider both ownership and control.

According to experts, those who are explicitly sanctioned (i.e. those whose names appear in black and white on a sanctions list) may make up only 5% of those who are sanctioned. The other 95% belong to wants called narrative sanctions.

This creates a significant challenge for organisations, as there is no finite sanction list to follow, but they must nevertheless ensure that they do not transact with any blocked entity.

For AML programmes within financial services, in the current climate it is particularly important to monitor economic and financial sanctions to impede various criminal activities such as money launderers, terrorists, narcotics trafficking, arms dealers, and human rights violators.

SOURCES

• https://www.netreveal.ai/resources/blogs/complying-with-sanctions-in-todays-landscape/#:~:text=A%20sanction%20can%20be%20explicit,specific%20names%20to%20screen%20against.
• https://www.refinitiv.com/perspectives/regulation-risk-compliance/sanctions-compliance-in-a-shifting-landscape/
• www.skadden.com/insights/publications/2022/12/2023-insights/new-regulatory-challenges/disparate-us-eu-and-uk-sanctions-rules
• https://elbornes.com/insight/uk-sanctions-post-brexit-the-new-owned-or-controlled-rules-having-problems-interpreting-them/
• https://complytron.com/blog/sanctions-what-is-the-50-rule/