Impact of Global Trade Sanctions

1
Impact of Global Trade Sanctions

• Finance Professionals Seminar
• Wednesday 29 August
• Macquarie Applied Finance Centre
• Fiona McNabb
• Email f_mcnabb_at_bigpond.net.au

2
Overview

• What are trade sanctions?
• Linkage to the new AML/CTF bill
• Examples
• Framework required to manage sanctions
• Potential business impact

3
What are sanctions

• Definition
• Sanctions are punitive or coercive measures
  against a state or its nationals
• Source Department of Foreign Affairs Trade
• Types of sanctions
• All UN member states, including Australia, are
  obliged to implement UN Security Council
  sanctions domestically.
• Australian businesses must comply with sanctions
  in all jurisdictions within which they operate.

4
Current Sanctions some examples

• Multilateral Sanctions
• UN sanctions include Iran, Afghanistan, Taliban,
  Al Qaida, Ivory Coast, Congo, Liberia, North
  Korea, Lebanon, Liberia, Sudan
• EU sanctions against Myanmar (Formerly Burma).
• Bilateral sanctions
• US sanctions against Cuba
• Australia recently announced bilateral smart
  sanctions against Robert Mugabes government in
  Zimbabwe.
• Sanctions can be targeted for example, there are
  currently UN sanctions against the following
  activities with Liberia and Congo
• Specific arms trading and military assistance
• Importing rough diamonds
• Sanctions against persons included in UN lists.

5
Jargon AML, CTF and ETS

• AML Anti-Money Laundering
• CTF Counter-Terrorism Financing
• ETS Economic Trade Sanctions.
• In most jurisdictions, the governance framework
  and processes used by banks to manage all three
  are the same.
• Australia has had weaker AML requirements (100
  point check, reporting suspect transactions and
  cash transactions over 10,000).
• New AML/CTF bill passed last year and comes into
  effect over stages from December 2007.
• This requires banks to use a risk based approach
  in assessing customers and transactions and
  aligns AML regulations to global sanctions
  requirements.

6
Fines and penalties

• Non-compliance with sanctions can result in
  significant fines, penalties and reputation risk
• AWB did not receive fines but there was a
  substantial impact on their reputation.
• UBS fined USD100m in 2004 for sending USD to
  Cuba, Iran, Libya and Yugoslavia.
• Riggs Bank fined USD25m in 2004 for failing to
  monitor suspicious financial transactions.
• ABN Amro fined USD80m in 2005 for illegal money
  laundering practices.

7
Some Primary Regulators and Stakeholders

• Australia
• Austrac
• Department of Foreign Affairs Trade
• USA
• Office of Foreign Assets Control (OFAC)
• UK
• Bank of England - Financial Sanctions
• European Union
• European Commission External Relations
• FATF (Financial Action Task Force)
• FATF

8
Key Regulations (1)

• USA Legislation
• OFAC sanctions (Executive Order 13224)
• International Emergency Economic Powers Act
  (IEEPA)
• Financial Crimes Enforcement Network Statutes
• Includes the Bank Secrecy Act, the USA Patriot
  Act, and other regulations.
• U.S. Money Laundering Terrorist Financing
  Statutes
• Money Laundering 18 USC Section
  1956 (criminalises money laundering)18 USC
  Section 2339A 
• 18 USC Section 2339B 
• Money Laundering Derived from Specified Unlawful
  Activity 18 USC 1957
• Civil Forfeiture 18 USC Section 981
• Criminal Forfeiture 18 USC Section 982

9
Key Regulations (2)

• Australian Legislation
• Charter of the United Nations Act 1945 (Cth)
• Anti-Money Laundering and Counter Terrorist
  Financing Act 2006 (Cth)
• UN
• United Nations in the Vienna Convention Against
  Illicit Traffic in Narcotic Drugs and
  Psychotropic Substances 1998
• United Nations Convention on Transnational
  Organized Crime (the Palermo Convention) 2002
• United Nations Security Council Resolution 1373
• Paragraph 1(c) of the United Nations Security
  Council Resolution 1373 requires States to
• Freeze without delay funds and other financial
  assets or economic resources of persons who
  commit, or attempt to commit, terrorist acts or
  participate in or facilitate the commission of
  terrorist acts of entities owned or controlled
  directly or indirectly by such persons and of
  persons acting on behalf of, or at the direction
  of such persons and entities, including funds
  derived or generated from property owned or
  controlled directly or indirectly by such persons
  and associated persons or entities.
• See also Resolutions 1267 (Assets of the Taliban)
  and 1390 (Assets of Al-Qaida).

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Main issues for banks

• Ensure that sanctioned countries and names are
  not included in any transactions or payments.
• International payments can be broadly defined as
  being of two types
• Documentary payments are traditional trade
  transactions supported by letter of credit and
  supplementary documents (bills of lading,
  invoices, certifications, insurance etc).
• Clean payments are bank to bank payments under
  instruction but not supported by trade
  documentation.
• Payments are generally via Telegraphic Transfer
  (TT) via SWIFT messaging but may be by overseas
  draft.
• Banks must block sanctioned payments and report
  them to the regulator.
• Most transactions involve US assets or
  persons so must comply with US sanctions.

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Examples of sanctioned transactions

• Australasian exports to Cuba
• No sanctions by Australia or NZ
• Sanctioned by USA
• Must not involve US assets or persons in any
  transaction.
• Imports from Sudan
• Sanctions change frequently and are complex
• US sanctions in place effectively banning
  transactions with Sudan without a licence
• There is a UN arms embargo against certain parts
  of Darfur
• Specific individuals and entities are named by
  the UN.
• Rough or conflict diamonds
• Must have certificate of origin (Kimberley
  Process Certification Scheme).

12
Managing Sanctions

• Off-the-shelf shelf filtering software is
  available
• Can check incoming and outgoing payments and any
  other transaction or customer information entered
  onto systems.
• However, judgment is required
• Names may not be a complete match
• May get a country match but the transaction is
  not sanctioned.
• Must have a process for assessing and then
  declining or approving transactions with full
  audit trail.
• Staff must have targeted training depending upon
  factors such as
• Nationality
• Type of business (eg domestic, global trade,
  international payments etc)
• Decision making capacity.

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Factors to Consider (1)

• Process for maintaining and communicating changes
  to sanctions
• Potential white list of safe names
• Must ensure all transactions are captured
• The checks required for documentary payments
• Whether there an obligation to understand the
  drivers behind all transactions, even if we have
  no credit exposure
• Whether transactions below a thresh-hold can be
  processed without a name check

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Factors to Consider (2)

• Frequency for reviewing customer and transaction
  details
• Level of delegations to apply to approval process
• Maintenance of sanctions policy and process
• Incorporation of sanctions management into new
  products and change programs
• Ensuring the right training is delivered on a
  ongoing basis
• Ensuring that managing AML, CTF and ETS is
  included in performance reviews (KPIs)

15
Factors to Consider (3)

• US sanctions particularly difficult because
• US sanctions are tougher than EU and UN sanctions
• Most transactions involve US assets or persons
• US penalties are high.

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Impacts of Global Sanctions

• Increased cost of compliance
• Potential cost of non-compliance (ie breaching a
  sanction and getting caught)
• Reputation risk
• Fines and penalties
• Likely increase in payments in EUR and other
  non-USD currencies so as to avoid having to meet
  US regulatory requirements
• Increased decline in documentary payments
• and finally
• Do sanctions work do they influence the
  behaviour of sanctioned entities and persons?