The Impact of Over-Compliance with Sanctions

The UN’s Alena Douhan, a Special Rapporteur, issued a warning highlighting the consequences of over-compliance. Many companies have been confused by the many unilateral sanctions imposed by governments against people and entities and have resorted to extreme measures in a bid to remain compliant.

What is Over-Compliance?

The United Nations defines over-compliance as a form of “excessive risk avoidance”. Over-compliance can take many forms, including: 

• Blocking all transactions with a sanctioned country, entity or individual, even in cases where transactions fall outside of the sanction’s scope or are exempted for humanitarian reasons (e.g. medicines, food, essential equipment);
• Using complex documentation, higher charges, rates and fees and lengthy delays for the purpose of discouraging authorized transactions;
• Freezing assets not targeted by sanctions;
• Denying individuals the ability to open a bank account or to complete a transaction as they are nationals of a sanctioned country, even if they are refugees.

Over-compliance leads to higher costs and delays in accessing much-needed humanitarian goods and services. Often NGOs and international organizations become unable to pay employees or are unable to access food, medicine, and spare parts required to carry out their work. Individuals may not be able to access their properties, transfer funds to their families, practice their trade or book flights and hotels.

In extreme cases, over-compliance may even have prevented states and diplomats from participating in international fora, impeding the functioning of diplomatic missions and the implementation of humanitarian and development projects. 

While the UN’s guidance on over-compliance has placed most of the emphasis on humanitarian impacts, there are commercial impacts to be considered as well, especially when financial institutions freeze assets that are not targeted by a sanctions regime or when individuals are denied access or the ability to open a bank account because they are nationals of a sanctioned country. 

The effects of these preventative measures or delays have rippled across the entire global economy, as it may make it more costly to purchase and ship goods to and from sanctioned countries. This may further fuel criminal activity as companies and individuals are forced to seek alternative routes to make payments to get around sanctions, clouding transactions and creating a shadow financial system. This drives and enables an underground economy supported by smuggling, corruption and illicit activities, which can spill into neighboring countries and last for decades. Individuals may also seek to escape poverty through drug or human trafficking or criminal activities that may lead to prosecution.

Over compliance had a significant impact in Afghanistan, where sanctions targeting the Taliban have led to difficulties bringing humanitarian aid to the country, and the situation may be repeated in Russia and Iran as many financial institutions choose to adopt blanket bans on all transactions for fear of a misstep that may invoke the wrath of the US and its rigorous sanctions regime. 

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An Informed Approach

Taking a risk-averse approach to sanctions compliance is understandable, especially when it comes to new and developing sanction regimes (as was the case with Russia), where multiple restrictions were rapidly imposed and evolved considerably from month to month. However, where an industry has clear guidance or automated sanction checking tools that they can rely on, the risk of breaching sanctions is reduced considerably.

According to the Special Rapporteur, firms can respond to sanctions risks in a more appropriate way by: 

• Reviewing sanctions compliance policies to determine if the restrictions they have imposed or plan to impose are broader than those required by sanctions and to adjust compliance accordingly;
• Monitoring, if applicable, the human rights impact of their sanctions compliance policy to mitigate or avoid harmful effects;
• Ensure the free flow of payment for goods necessary to guarantee the basic needs of the population in targeted countries, including medicines, medical equipment, spare parts, food, seeds, fertilizers, electricity, water, housing, raw materials, transportation, humanitarian aid and the implementation of development projects and humanitarian projects.

Conclusion

The complexity of sanctions regimes, burdensome administrative processes as well as the threat of business penalties for breaching sanctions is just a few of the reasons why financial and business institutions may resort to over-compliance rather than face the risk of being sanctioned themselves. 

Many of these companies may not have the internal resources or the expertise to evaluate the human rights impact of sanctions compliance policies or whether the scope of sanctions applies to their business. 

While it’s always wise to err on the side of caution, over-compliance is wholly unnecessary and unfair. It’s best to rely on outside expertise and to implement other safeguards that ensure compliance obligations are met and not exceeded.