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In an increasingly complex geopolitical landscape, sectoral sanctions have become a central tool of economic diplomacy. Unlike comprehensive economic sanctions, sectoral sanctions are narrowly targeted, aiming to restrict specific economic sectors, such as energy, finance, or defence. Whilst this targeted approach minimizes humanitarian impact, it presents significant compliance challenges for ambitious global businesses looking to scale their operations and seamlessly transact across borders without delay. Recent enforcement actions and a shifting geopolitical landscape require an agile and rigorous sanctions program to properly navigate and comply with sectoral restrictions.
Recap on the legal framework
Economic sanctions are restrictive measures imposed by governments or international bodies to apply pressure upon individuals, entities, or countries. Sanctions can take various forms:
- Comprehensive sanctions that target entire countries (e.g. North Korea, Iran in certain contexts)
- Targeted sanctions against individuals, companies, or sectors (e.g. financial restrictions, asset freezes)
- Trade sanctions that limit the export or import of goods and technology
- Travel bans on specific individuals
For a global business, there are multiple sanctions regimes and multiple approaches to regulatory enforcement activities to monitor which may include but are not limited to:
| Jurisdiction | Legal Framework | Primary Regulator | Other Key Agencies |
| UN | UN Charter Ch. VII | UN Security Council and Member States | Panels of Experts, Sanctions Committees |
| U.S. | IEEPA, TWEA, EO, CFR 31 Parts 500–599 | OFAC | BIS, DOJ, State Department |
| EU | CFSP, TEU, TFEU, Council Regulations | European Council/Commission | Member State agencies (e.g., BAFA, DG Trésor) |
| UK | SAMLA 2018, Sanctions Regs | OFSI (HM Treasury) | ECJU, NCA |
| Australia | UN Act 1945, Autonomous Sanctions Act 2011 | DFAT (ASO) | AUSTRAC, Border Force, AFP |
These are separate and in addition to the number of export controls which regulate the export, transfer or disclosure of specific goods, technologies, services, and know-how.
Navigating sectoral sanctions
Sectoral sanctions are a type of economic sanction, typically implemented through mechanisms such as the U.S. Treasury’s Sectoral Sanctions Identifications (SSI) List under Executive Orders. These measures do not freeze assets outright but prohibit specific transactions, such as providing financing or technology for designated entities.
Compliance challenges arise from the specificity and evolving nature of these restrictions. To comply with sectoral sanctions, companies need to understand who is sanctioned, what types of transactions are prohibited, and under what circumstances. Understanding this level of detail to assess sanctions risk can be difficult especially when needing to transact quickly and especially in the absence of a central source of sectoral sanctions.
Specific compliance challenges include:
1. Assessing ownership and control
There are variances across the US, UK and Australia in relation to what constitutes ownership and control for the purposes of determining if an entity is a sanctioned person.
- In the US, any entity that is 50% or more owned by a sanctioned person is itself considered sanctioned. Companies should exercise caution when dealing with non-sanctioned entities where sanctioned individuals hold significant but less than 50% ownership or exert control through other means.
- In contrast, in the UK, an entity is considered owned or controlled by someone if that person holds over 50% of shares or voting rights, can appoint or remove most of the board, or can reasonably be expected to direct the entity’s actions.
- In Australia, there is currently no guidance on how to assess whether an entity is owned or controlled by a designated person.
Navigating complex ownership structures to determine whether there is a sanctions risk can be challenging particularly given variances in approach to ownership and control in the sanctions context (as above) and the opacity in corporate structures in secrecy jurisdictions.
2. Ambiguity in prohibited activities
Sectoral sanctions often prohibit a narrow set of transactions, such as dealing in new equity or long-term debt. The definitions of these activities can be ambiguous resulting in uncertainty around whether the transaction falls within the prohibited scope. This is particularly challenging where there is limited transaction data to assess the risk. Once it is clear what circumstances need to be monitored, a significant level of tracking is also required to identify a sectoral sanctions risk within a transaction.
3. Jurisdictional differences
A cross-border transaction may be lawful under EU sanctions but then may violate US sanctions. Navigating the differences in sanctions regimes across jurisdictions and putting in place practical measures to address any sanctions risks is critical to a global business looking to transact seamlessly across borders.
4. Third-Party Risks and Supply Chain Exposure
Indirect dealings through vendors or intermediaries can inadvertently cause sanctions breaches. A fast-growing FinTech looking to scale through embedded finance models may encounter indirect sectoral sanctions risks due to the layered nature of how financial services are delivered and involvement of multiple intermediaries. Without thorough due diligence of the end-to-end supply chain and ongoing monitoring, companies may find themselves unwittingly entangled in prohibited dealings.
Lessons from Recent Enforcement Actions
Recent enforcement actions related to sanctions have intensified globally, reflecting a robust approach by regulatory authorities to curb violations and enhance compliance. Sanctions have been broadened to encompass various sectors, including finance, energy, and technology, targeting entities that support sanctioned activities.
For example, in 2023 alone:
- Binance Holdings Ltd, a Cayman Islands-based virtual currency exchange, agreed to a $968.6 million settlement for violations of US sanctions, including those under sectoral sanctions programs targeting Russia. The case sent a clear message that offshore tech platforms must comply with US sanctions and other major sanctions regimes if their products and services have a nexus with those jurisdictions.
- Microsoft agreed to pay nearly USD3M to settle potential civil liability for approximately 1300 violations of multiple OFAC sanctions programs, including those related to Cuba, Iran, Syria, and Ukraine/Russia. The violations primarily involved the exportation of services or software from the US to comprehensively sanctioned jurisdictions and to Specially Designated Nationals (SDNs) or blocked persons. The case emphasised the importance of effective screening not just at onboarding but throughout the relationship lifecycle, especially when ownership structures change.
Preparing in advance for a sanctions event
A sanctions event is any incident or development that triggers regulatory risk or legal obligations related to sanctions laws. It typically involves a breach, suspected breach, or a material change in sanctions exposure. Such events may have legal, financial, reputational, or operational consequences. A strategic approach and advance preparation can mitigate these risks.
A sanctions event may require:
- Immediate internal escalation and external legal advice
- Notification to regulators (i.e. OFSI, OFAC, FCA)
- Suspension or termination of relationships with high-risk entities
- Asset freezes, transaction blocking, or re-screening
- Regulatory reporting or remediation
A number of strategies and tools can be deployed to properly manage a sanctions event against an evolving geopolitical landscape. Such strategies and tools can be applied to any sanctions event (including but not limited to the introduction of new sectoral sanctions) and may include:
- Deploying appropriate screening mechanisms to identify changes in Sanctions that could trigger a sanctions event for your organisation. This is important for identifying new sectoral sanctions or changes to existing sectoral sanctions that may not be well publicised.
- Thinking ahead about who to involve in your organisation and who needs to be engaged externally. Expert legal advice may be required about whether there is a sanctions risk for a specific transaction(s) and how to mitigate it.
- Ensuring you have a clearly drafted/easy to follow sanctions document suite including a Sanctions Policy and a Sanctions Playbook including procedures relevant to the above actions and a relevant and appropriate escalation protocol.
- Understanding the operational impact of the sanctions event and proactively educating relevant teams across your organisation (i.e. sales, finance and procurement) about the sanctions event and the procedures the organisation in place to respond and continue to comply with sanctions laws. Proactive engagement and clear communication with teams may prevent adhoc queries to the central sanctions team and enable a strategic approach to responding to sanctions events.
- Maintaining records of all the actions undertaken to respond to a sanctions event and comply with sanctions laws.
Building an agile compliance program based on the above that is capable of adapting quickly to new designations and enforcement interpretation will give companies looking to seamlessly transact across borders a competitive advantage.
Are you a global growth focused enterprise looking to develop a robust Sanctions Policy or agile Sanctions Response Playbook? Get in touch!…