Sanction. A curious word in the English language; When used as a verb it means to officially approve of a specific action, while when used as a noun refers to restricting or banning an action - seemingly opposing definitions, according to the dictionary anyway. But today we're here to talk about what it means within the context of a government foreign policy program and what it should mean to you and your business.
First, let's get down to basics
Sanctions programs have been around in some way or form since governments were invented. In its most rudimentary form, try to think of a sanction like this:
Residents of Kookaburra village have a huge argument with residents of Kakapo village about a dam they built on a river they share, which is now destroying their cotton crops. The chief of Kookaburra village decides he's had enough, but rather than risk getting into a physical fight, the chief and the elders agree to retaliate by forbidding their people from selling cotton to anyone in Kakapo. Now this action does inconvenience the people of Kookaburra because they mainly sell cotton to Kakapo, meaning they now have to find brand new villages to sell their product to. But the real intended effect of this decision was to hurt the villagers in Kakapo because they weave cloth for a living. Without access to cotton, their trade dwindles and their villagers begin to starve. However, two weavers in Kakapo somehow have found access to a small amount of cotton, they manufacture cloth at inflated prices and are the only two in the village who seem unscathed by the issue. In desperation and unable to figure out how to solve the problem, Kakapo's chief and elders eventually agree to demolish the dam in the river in exchange for Kookaburra agreeing to sell them cotton again.
The analogy shows the basics of how chiefs and elders (we know them as heads of state and national security councils) design sanctions programs. The people on both sides often suffer to a varying degree, but sanctions do have their place in achieving goals. However, it's important to note that an emergence of a black market almost always goes hand in hand with sanctions implementation - as seen by the two weavers who mysteriously managed to procure cotton and continue to trade at inflated prices. This is why out in the real world, some sellers will always seem to be able to stock goods which are not supposed to exist in a market at a given time.
Now, modern sanctions programs, on the other hand, trace their history back to the League of Nations, the predecessor to the United Nations, which first sanctioned Italy (a member country) in the 1930s for invading Ethiopia (another member country). The agreement, known as a covenant, specifically prohibited acts of war among members and would use trade and financial embargoes as punishment for breaking these rules. These first sanctions were poorly implemented and largely proved to be ineffective because cutting off a whole country from all forms of finance and trade is expensive and difficult to do. In nearly a century since then, countries and international organisations have gotten a lot better at implementing and enforcing their sanctions, riding off the back of international cooperation, expansion of trade routes, and the internationalisation of financial markets.
So, why do these programs even exist?
The main reason to start a sanctions program is to enforce foreign policy without resorting to violent conflict. It's an unpopular opinion, but sanctions are the war machines of the 21st century. They can be used to apply pressure to a sanctioned party by denying them access to daily necessities, weapons, and money. Officially, these programs are created in response to three main issues (perceived or actual):
Violations of international law - Terrorism, narcotics, human trafficking, money laundering, and other forms of organized crime.
Threats to peace - Creation of weapons of mass destruction by specific groups or any action which can lead to war.
Politics or activism - violations of treaties, official policy, environmental destruction, or human rights abuses.
How many sanctions programs are there?
In short - too many. There are sanctions programs by individual governments and international organisations, both domestic and international, directed at individuals, groups, companies, and even entire countries. Sanctions programs are so varied and oddly specific you can find yourself allowed to do business with a person if you were selling canned tuna, but barred if you have a shipment of laser lights instead; Allowed to conduct your trade in Chinese RMB, but barred if you attempted the same transaction in US Dollars.
What's most important is finding out which one of these specific programs have an actual effect on your business model, and then deciding which markets (geographic or currency) you need to pay special attention to. Here are some of the more popular sanctions lists which most people refer to:
International Organisations - UN Security Council, EU Financial Sanctions, World Bank Ineligible Firms and Individuals.
Influential countries - US OFAC Lists, UK HMT Financial Sanctions, Canadian Autonomous Sanctions List, Australian DFAT, Swiss SECO, or the newly-created China UEL.
Law enforcement agencies - Interpol, FBI, and other national most wanted criminals lists.
While the above lists are often referenced as the base of most companies' sanctions monitoring programs, it's always important to remember that your country's government probably has a smaller, albeit lesser-known, sanctions program which needs to be adhered to first. In other words, don't forget to comply with national sanctions screening while you design your compliance practice.
But what does this have to do with me? I'm just a small business owner!
Unfortunately, even without knowing, it could have everything to do with you. Perhaps you run a trading company and happened to include Iranian saffron in a shipment to the US, or perhaps you run a travel agency and attempted to book a flight for an employee of a blacklisted company. Or even worse, a situation where you buy and sell online gift cards and happen to secure a large order through a company owned by a sanctioned individual.
Small and medium businesses make up the bulk of most economies, and hidden between every legitimate are shell companies disguised as mom-and-pop operations. As a small business owner, you could be taking on risk without even knowing it just by striking up a legitimate deal with a less than legitimate counterparty.
Okay, so what should I do?
Some of the things you should watch out for are news and circulars from international agencies such as FATF and the UN about sanctions. First, pay special attention to countries being sanctioned and then double-check if the products you trade in are on that list. Second, if you conduct a B2B model always ensure you keep records of who you are doing business with. And finally, ensure that you are familiar with dual-use goods - items that seem like commercial or retail items but have a secondary military use (semiconductors, radio equipment, chemicals, software, etc.)
Dicorm can help you figure out what obligations you have in terms of sanctions compliance or if your business even has any risk and set up your internal processes to mitigate them. Contact us today for a no-obligation chat about your monitoring and reporting setup.