Sanctions – what to do?
As we have already previously emphasized, sanctions must be complied with not only by those who have a direct obligation established in the Law on International Sanctions and National Sanctions of the Republic of Latvia to perform sanction risk assessment and develop an internal compliance system. Everyone must comply with the sanctions! Including individuals, business entities, associations, foundations, self-employed, and farmsteads either, etc.
A failure to comply with the sanctions may cause crucial adverse consequences. Furthermore, any collaboration with sanctioned persons or persons affiliated to sanctioned persons in certain cases may result in adverse consequences. Therefore, take your time and resources now already in order to avoid scooping up spilled water at a later time.
Where to begin?
Begin with yourself. Verify, to the extent possible, whether your company is affiliated to a sanctioned person or not. Please verify not only the direct and indirect shareholders, members, ultimate beneficial owners etc., but also members of their management board and supervisory board, chief executive officers, presidents, etc. If there are no sanctioned persons – great! If there are, first it is necessary to understand what sanctions have been imposed (incl., who has imposed them and what the restrictions are), because it infers from there whether and what restrictions are applicable to you. Please bear in mind that the criteria for the sanctions to be attributed to a person who is not subject to sanctions itself while affiliated to the subject of the sanctions differ depending on who has established the sanctions.
For example, the “50% rule” in case the EU sanctions means more than 50% of a direct shareholding (i.e., above 50%) whereas in case of OFAC sanctions – 50% and more of direct, indirect (“cascade” principle) or joint shareholding (aggregation of the shareholding, i.e., shareholding of all sanctioned persons jointly is taken into consideration, and 50% of the shareholding is sufficient already). If the sanctions cannot be applied based on the 50% rule, then in the case of the EU sanctions the “control” is also evaluated, whereas in case of OFAC sanctions – the “economic benefit” either. Various sources are publicly available for resolution of simpler cases with one’s own resources. Therefore, depending on circumstances of the case and surrounding aspects, one should evaluate whether it is necessary to engage an expert for assistance.
If, in your own opinion, the sanctions are not applicable – great; however, be prepared to defend/justify your own opinion to both customers and business partners, as well as service providers, and also, probably, the media and law enforcement agencies. Quite recently there was a press release in the media that a major Latvian company was also subjected to the OFAC sanctions because it was affiliated to sanctioned persons. No extensive explanation was given in the press release as to why the sanctions were applicable to this Latvian company, just a simple note how the relevant company was affiliated to a sanctioned person. Even though later the press release was updated with a reference that the company is merely affiliated to the sanctioned persons, and not subjected to the sanctions itself, probably, such a report made customers and business partners of this company worried and assessing possibilities to further continue with cooperation with the respective company. Accordingly, a detailed and substantiated evaluation as to why the sanction are not applicable even if you are affiliated to the sanctioned person, might come in handy.
Conversely, if you are directly or indirectly subjected to the sanctions, you must carefully weigh whether and how to mitigate the consequences caused by the sanctions.
If you do not preform verification of your customers, business partners, service providers and all other possible persons with the sanction lists yet, this is the time to begin before it is too late. The level of thoroughness with which the verification is to be conducted (incl., whether the due diligence is to be performed and all persons known to be affiliated with the person are to be verified; what searches are to be made and how frequently) depends on the sphere of your own activities (services, goods, countries of operation, etc.) and with whom (sphere of activities, country of registration, countries of operation) your activities are related. Therefore, the sanction risk assessment needs to be made by all, not only those who has the separate obligation expressly established by the laws and regulations.
The sanction risk assessment is the most suitable tool to understand whether and specifically how your company may breach the sanctions or get involved in breaching or circumventing the sanctions. Public sources have guidelines in abundance as to how to perform the sanction risk assessment. However, to perform a proper sanction risk assestment, one must possess a good understanding of the sanctions per se. Therefore, it is advisable to consider performing the sanction risk assessment in collaboration with an expert in sanctions.
After the risk is identified you may introduce relevant measures to manage this risk or, if necessary, to mitigate it. Often it will be sufficient to verify, once in a while, the customers, business partners, service providers etc. against the sanction lists. However, in certain cases it will be necessary to introduce more serious measures for mitigation and management of the sanction risk, for instance, a due diligence of certain persons (incl., their areas of operation, business partners, etc.) before establishing a business relationship, and, possibly, in the course of business relationship, restriction of dealings with certain persons, regular and detailed verifications against the sanction lists, etc.
Currently, ready-made tools for sanction risk management are already available; however, it is advisable to carefully weigh whether the tool suits your needs and is really necessary/feasible to you. We certainly recommend paying attention, among other, to where and when reference data (sanction lists) is obtained for performance of searches, how searches for sanctions are being conducted (i.e., what criteria of search, algorithms, etc.), how often searches are made, how the findings of searches are registered and saved, and whether they conform to the applicable rules and requirements.
What else can be done?
It is advisable to revise concluded contracts and contract templates used in operations in order to ascertain that in case the opposite party of the contract is subject to the sanctions or becomes affiliated to the sanctioned person, you have sufficient rights contracted, for example, to terminate or suspend the contract, freeze payments, terminate provision of services or delivery of goods. If such provisions are not included in the concluded contracts or are deficient, it is advisable to incorporate or amend accordingly.
What do you if you encounter a sanctioned person though?
First ascertain whether the person is really directly sanctioned or only affiliated to a sanctioned person (for instance, a shareholder, a member of an executive body, ultimate beneficial owner, etc.). If merely affiliated to the sanctioned person, then you should ascertain whether the restrictions under the sanctions are attributable to the specific situation. Even if the sanctions are not breached or circumvented, one still has to assess whether and how a business relationship with the respective person and other business partners may be affected by a person sanctioned directly or indirectly. Furthermore, such assessment should be performed when you have business relationship with a person which is not subject to sanctions, but is somehow linked to a person subject to sanctions.
The risk that the company operating only in Latvia (including, in terms of customer base, business partners and all other respects) and in a sector which is not related to the “sanctioned” goods/sectors will breach the sanctions or will be inadvertently involved in breaching or circumventing the sanctions is low, as a general rule. However miniscule, this risk exists though, and, taking into account possible grave consequences (incl., criminal liability) in case the sanctions are breached, this risk should not be ignored.
We can assist you with your sanction risk assessment and development of the relevant procedure for sanction risk management (incl., mitigation), as well as evaluation of current contracts and templates of contracts, and supplementing/updating thereof. Furthermore, we can carry out due diligence of a business partner, customer, service provider etc. of yours and your business partner either, as well as carry out due diligence of a transaction already concluded or contemplated yet in order to identify possible sanction risks. We can provide you with assistance on all aspects to be resolved in order to ensure compliance with the sanctions in your operations.
In order facilitate understanding of the sanctions by a wider public and everyone’s obligations to this end, we kindly invite you to take part in a webinar held by FORT on the 18th of March which will be streamed from 9:15 am to 10:15 am and where we will talk about the most essential aspects of the recently adopted sanctions in a simple and easily comprehendible manner.
You can apply for the webinar by writing to email address email@example.com or submitting an application form HERE. The webinar is free of charge and will be conducted on Microsoft Teams platform in the Latvian language.
The Sanctions Act – the Act on the International Sanctions and National Sanctions of the Republic of Latvia.
The Consolidated List of Sanctions Established (by UN and EU) Maintained by the Financial Intelligence Unit (FIU) – this does not include all sanctions binding on Latvia, incl., sectorial EU sanctions, which are established against a specific region, or product, or service, and not an individual or legal entity. Furthermore, the sanctions established by OFAC are not included there.
OFAC Sanctions List – the consolidated sanctions list of the Office of Foreign Assets Control (OFAC) of the US Department of the Treasury.
ES sanctions search tool (EU Sanctions Map) – this is a convenient tool to conduct searches for the EU sanctions (incl., those established against specific region, product, service) and understand what sanctions have been imposed on the respective person.
Guidelines of the Ministry of Foreign Affairs for successful introduction of sanctions in Latvia – there is a general information available regarding sanction regimes, exemptions of restrictions, how removal from the sanctions lists is effected, etc.
Information compiled by the Ministry of Foreign Affairs regarding the sanctions – there a broad information is available as to the sanctions, among other, general descriptions and responses to general questions and specific questions associated with the sanctions (including the OFAC sanctions).
Legal framework for management of the sanction risk – regulations of FCMC where individual factors exposing to the sanction risk are listed which can be taken into account upon evaluating one’s own sanction risk, as well, as well as possible signs of increasing the sanction risk.
Guidelines of the State Revenue Service (SRS) for sanctions risk assessment – the guidelines of SRS where individual factors having impact on the sanction risk are outlined; and these can be taken into account upon assessing one’s own sanction risk..
Seminar of SRS regarding sanction affairs – a presentation of the seminar “Compliance with the Sanctions Regime by entities of the Act on the Prevention of Money Laundering and Terrorism and Proliferation Financing. A record of the seminar is available here: https://www.youtube.com/watch?v=pLDaJz4I318.
EU model practice with respect to effective implementation of the restrictive measures – this document outlined the key elements for implementation of the sanctions and provides recommendations for effective implementation of the sanctions.