Sanctions Compliance – Key Issues for Trustees and Financial Institutions

The increased use of financial sanctions against individuals and businesses adds to a complex regulatory landscape, with several fundamental issues that fiduciaries and financial institutions should be aware of when dealing with sanctions compliance.

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With the growing importance of financial sanctions as a tool of foreign policy, we have seen an increase in the number of sanctions regimes applied against individuals and companies in a wide range of sectors. This increase in the use of financial sanctions poses particular compliance risks and below we explore some of the fundamental issues facing administrators and financial institutions in the Bailiwick of Guernsey in complying with Guernsey’s various sanctions regimes.

Legal framework

The main economic sanctions legislation in Guernsey is the Sanctions (Bailliage of Guernsey) Act 2018 (the Sanctions Act). The Sanctions Act gives the Policy and Resources Committee the power to apply UN, EU and UK sanctions regimes domestically, as well as the ability to impose sanctions regimes. independent sanctions if necessary.

In practice, Guernsey adopts the sanctions regimes as operated by the UK Government through the Sanctions (Implementation of UK Regimes) (Bailliage of Guernsey) (Brexit) Regulations, 2020 (the UK regulations). A list of the plans in force is maintained on the States of Guernsey website.

Although the Sanctions Act allows the imposition of a wide range of sanctions, Guernsey’s position as a leading financial center means that financial sanctions are most relevant to businesses in the Bailiwick. Financial sanctions are broad and can include a wide variety of measures such as the freezing of assets as well as a ban on making funds available to designated entities or individuals.

Compliance with reporting obligations

The Sanctions Act imposes a general reporting obligation in Article 14, which is similar to the obligations relating to money laundering and terrorist financing. These obligations apply to “relevant” institutions as defined in the section, financial services companies being targeted.

So what exactly must be declared to fulfill the obligations under the Sanctions Act?

It is important to understand that Article 14 does not only cover circumstances where a breach of the sanctions is believed to have occurred. The obligation is much broader and a report must be made in circumstances where it is known or suspected that a person or entity is a sanctioned person or is related to a sanctioned person. This is regardless of whether any activity that would constitute a sanctions violation has been undertaken or is contemplated.

Nor are reporting obligations under the sanctions law limited to persons or entities that are clients of a relevant institution. A reporting obligation would arise in circumstances where a sanctioned person or entity is known or suspected to be related to one of its clients; such as through beneficial ownership.

Once it has been determined that a report is required, it should be presented to the Policy and Resources Committee. Generally, there is no need to report to the Financial Intelligence Unit unless there are additional suspicions regarding involvement in money laundering or terrorist financing.

Identification of sanctioned persons and assets subject to sanctions

The key to ensuring sanction risks are identified in a timely manner is a robust and effective screening and alerting system that appropriately captures and highlights potential hits. These must be continuously tested to ensure that risks are not ignored. Any breach of the provisions of the Sanctions Act, even inadvertently, can have serious consequences, with criminal liability attaching to most offences.

The use of complex structures in Guernsey means that once a potential sanctions risk has been identified, it can be difficult to determine which assets within a structure will fall under a sanctions regime and what what should be done with these assets.

Although the technical analysis of the condition of assets should be the subject of legal advice, there are general principles to consider. When considering a structure, two key questions should be asked upfront:

1. Are there any assets within the relevant structure that are owned, owned or controlled by the named person or entity?

2. Would the management of the assets make them available directly or indirectly to the designated person or entity?

It is not necessary to demonstrate clearly that the assets are “owned, held or controlled” by a named person or entity or would be made available to him – if there is a suspicion that a person or entity has committed a breached or subject to sanction measures, or one of the above two points applies, this may trigger obligations under the Sanctions Act.

What is meant by “held, detained or controlled”?

Although the Sanctions Act does not provide us with a definition, the effect of the Sanctions Act is to transpose UK regulatory requirements into Guernsey law and the UK regulatory definitions provide guidance.

UK regulations generally take a broad approach to defining what amounts to ownership or control of assets. It includes the legal or equitable interest in the assets and will extend to direct and indirect interests. For example, the holder of a bank account will clearly own the funds in that account.

The issue of indirect ownership or control, where a company or trustee owns and holds the assets, may require further consideration. UK regulations provide that a body corporate (C) is owned, owned or controlled by another person (being the named person) (P) if either of the following two conditions is met;

• P holds more than 50% of C’s shares or voting rights or P holds the right to appoint or dismiss the majority of the members of C’s board of directors, or;

• it is reasonable to expect that P (if P chose to do so) would be able, in most cases or in significant respects, directly or indirectly, to obtain the result of C conducting its affairs in accordance with to the wishes of P.

Similar principles apply to individuals. The question of whether a person exercises “control” over another person requires an objective assessment of the risk that, if a person so wished, he could ensure that the affairs of another person or entity would proceed as he intended. meant to adjust. This question may be difficult to answer and various factors may be taken into account when considering this point, such as the involvement of a sanctioned person or entity in a relevant structure, as well as points wider, such as any family or professional ties that may indicate a risk of indirect control. This is an important feature in the context of sanctioned individuals who structure their affairs to expose assets at arm’s length.

Address requests for processing sanctioned assets

How should a request for access to assets that are or are suspected of being subject to sanctions be approached, and what constitutes a transaction with the assets?

On this point, the Sanctions Act provides a definition in Article 5(2) which is broad and encompasses a wide variety of activities and would constitute most forms of transactions. This includes a ban on anything;

• use, modify, move or allow access or transfer;

• deal with the funds in any other way that would result in a change in their volume, amount, location, ownership, possession, character or destination; Where

• make any other changes that would allow the funds to be used, including through or in connection with portfolio management, and

• in relation to economic resources, the exchange or use in exchange of funds, goods or services.

Although there may be pressure to come to a decision quickly on the treatment of sanctioned assets, it is important to look at the situation from all angles to avoid being drawn into a position where you are breaking the law on assets. sanctions or its provisions on circumvention.

Where an asset or set of assets meets the relevant criteria to be frozen under a Guernsey sanctions regime, any deviation from these measures requires a licence, which is in effect written authorization from the Policy Committee and resources allowing activity that would otherwise be prohibited by the sanctions. measures. There are limited grounds on which a license may be granted and these vary between different sets of penalty measures. All license applications must be made through the Policy and Resources Committee.

Conclusion

Sanctions compliance can be a difficult area to navigate and will only become more complex as the use of sanctions increases globally. If you need advice on separate sanctions regimes or on sanctions compliance more generally, please do not hesitate to contact a member of the Mourant team.

Marianne R. Winn