21 Dec 2022
Governments use economic and trade sanctions as a tool to accomplish foreign policy or national security objectives by placing limitations on specific kinds of transactions with targeted nations or individuals. Sanctions are frequently implemented in an effort to effect change in situations including armed conflict, international terrorism, the proliferation of WMDs, drug trafficking, violations of international law, human rights, or political stances that disregard the rule of law or democratic values. They seek to achieve these political goals without using force, as well as to reestablish world peace and security and uphold security interests. Many nations view them as an essential and priceless tool in a variety of international problems.
The risks to businesses in the UAE have dramatically increased as political tensions increase in an atmosphere that is becoming more unstable globally. To prevent major financial and legal ramifications for their operations, personnel, and directors, it is crucial that businesses are aware of the risks posed by this global volatility and continue to comply with quickly shifting regulatory regimes.
Financial sanctions are frequently imposed against foreign nations, including people, companies, and entire economic sectors, during times of international crises. These sanctions have far-reaching effects on not just those who are subject to them but also any third-party businesses or people who may already be working with or planning to work with a client who has been sanctioned. This article aims to provide a helpful primer on the risks UAE organizations could encounter while engaging in such activities and how to maintain compliance.
Financial Sanctions
Financial sanctions, in general, refer to any limitations placed on a person or organization that impact what they are able to do with their assets and money. The freezing of assets is a typical financial sanction. This imposes limits on third parties interacting with frozen assets and is meant to prevent the sanctioned party from being able to access or use their assets and funds. Examples of eligible assets include, but are not limited to, the cash directly held by the sanctioned person or business, the property owned by that person or business, the stocks, shares, and other assets of any company that is majority owned or where the controlling interest is held by a sanctioned person or business, as well as any other tangible or intangible asset (including ships, aircraft, and other forms of property owned by sanctioned individuals).
Are there Local Sanctions in the UAE?
Yes, the UAE must enforce sanctions imposed by the UN against any person or business listed on the UN sanctions list because it is a UN member state. Additionally, the UAE creates what is known as "local lists," which are essentially its own system of sanctions that primarily target terrorism risks. The UAE is a member of the Arab League, GCC, and Terrorist Financing Targeting Center, all of which have the authority to impose financial sanctions that the UAE may occasionally enforce. The relevant Executive Office and the UAE Central Bank have recently fined financial institutions for failing to establish effective anti-terrorist finance systems, as part of their active enforcement of its penalty policy.
How Can I Tell If a Client Is Sanctioned or If We Are Engaged?
Anyone and any business may be subject to financial penalties. Businesses should first and foremost refer to the pertinent UAE sanctions lists mentioned above. You should then review the international sanctions lists that are pertinent to you after confirming the customer is not on any of these lists (see below). There is no global unified list that firms can unambiguously consult to ensure they are not unintentionally breaking sanctions regulations because different countries have distinct regimes in place. This emphasizes the significance of thorough and thorough "Know Your Customer" and anti-money laundering checks. Firms should always perform manual checks on pertinent databases in addition to various software solutions that can check individual databases.
How Do I Determine Which Global Sanctions Regulations Apply To My Business?
You should research the regulations that apply in the jurisdiction where your firm is registered if it conducts business there or if it is a subsidiary of a company that is registered there. You may still be compelled to abide by such regulations even if your subsidiary does not do business there.
Second, you should review the relevant sanctions lists and regulations of those countries if your company employs foreign nationals or if a company director or shareholder is a foreign national from outside the UAE. This is because some jurisdictions may have obligations to their citizens to comply with their sanction regulations outside of their own borders.
For instance, UK nationals living abroad and UK-registered businesses operating abroad are forbidden from handling the funds of anyone for whom the UK government has issued an asset-freezing order. If they do not comply.
What must I do in order to comply with international sanction regulations?
Different legal systems will have various requirements. The majority of sanction regimes forbid dealing with a sanctioned person's financial assets, including but not limited to: making money available to the sanctioned party; taking any actions that might materially alter the amount, kind, or value of the money; and it might even be forbidden under some regimes to 'deal' (deliberately ambiguous) with a sanctioned party in any way. As a result, it is crucial that you consult a financial lawyer or carefully and carefully review any applicable international sanction regimes that you might be affected by.
What Penalties Could I Experience If I Don't Comply with International Sanctions?
These, once more, can differ depending on the jurisdiction and can include both civil claims and criminal prosecution. Any employee, manager, or director of a corporation who violates the penalty guidelines may be subject to the penalties. As a consequence of violating them, it is also possible for you or your business to be subject to international sanctions, which is frequently practically irreversible and can have disastrous business repercussions. To learn more about the exact fines that organizations and people may be subject to, consult the pertinent guidance from the respective jurisdictions. In the UAE, violating local sanction laws carries particularly harsh penalties, including the possibility of criminal prosecution, maximum fines of AED 100,000,000, prison terms, and in some cases, the death penalty.
What Can I Do to Comply with Sanctions While Continually Or Potentially Entering Into Business With Sanctioned Companies Or Persons?
You will probably need to stop doing business with a sanctioned person right away if you are operating in the UAE and doing so. Where a corporation or person has been sanctioned by another nation is the more complicated query. Many people who are not Americans, Britons, or Europeans believe there is no justification for them to abide by a foreign nation's rules, especially when there is no apparent justification for why that person or company has been penalized. They might be correct. However, keep in mind that you may become subject to its jurisdiction if you use one of those countries' banking systems (for example, by sending US dollars).
It may be feasible to deploy a so-called "Chinese-wall" approach when international financial sanction laws only apply to specific personnel who are citizens of the penalizing country. This can be a sort of compartmentation within a firm where those people who are completely excluded from any decisions or information relevant to a sanctioned individual or company due to home-country sanction requirements from any deal pertaining to that individual or company.
How are Penalties Applied?
The US President, acting under broad statutory authority to address international crises, issues the majority of US sanctions through an Executive Order. Sometimes the US Congress passes laws imposing sanctions on particular nations or people. The US Treasury, State, and Commerce Departments typically use regulations or other administrative means to carry out executive orders and sanctions statutes. These executive branch departments are empowered to look into suspected sanctions violations and impose civil fines on offenders. The US Department of Justice, US Attorney’s offices, and some state and local prosecutors are permitted to ask US courts to impose criminal penalties. The majority of sanctions fall under federal law, not state law. The US Congress has authorized some limited economic sanctions measures by state and municipal governments, and some state banks regulators have adopted an active stance toward economic sanctions.
Obligations for Targeted Financial Sanctions According to the New Guidance
Article 60 of the AML Regulations, which is summarized in the chart above that is linked, mandates adherence to directives given by any UAE authority in charge of carrying out United Nations Security Council resolutions pertaining to the suppression and prevention of terrorism and terrorist financing. Despite the fact that Article 60 is not specifically mentioned in the Guidance, it is conceivable that it serves as a foundation for the Executive Office, which is the UAE body in charge of carrying out UNSC resolutions, to specific legal requirements in the Guidance. In this regard, the Guidance lays out important standards that, despite being primarily aimed at financial institutions and DNFBPs, extend to all legal and natural persons in the UAE. All UAE citizens, whether natural or legal, are required to.
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Screen by doing ongoing and daily checks against the United Nations and UAE sanctions lists, including the UAE's regional terrorist list ("Sanctions Lists"). The identities of participants to any transactions, future customers, beneficial owners, names of people the relevant UAE person has a direct or indirect relationship with, directors and/or agents operating on behalf of customers, and existing customer databases must all be checked.
Apply targeted financial sanctions to those people and organizations that are designated on one or more of the Sanctions Lists by freezing their funds and stopping all financial transfers to them. It's important to note that freezing differs from rejecting. A money transfer rejection entails declining to complete the transaction and returning the transferred monies to their original owner. When money are frozen, the person enforcing the targeted financial penalties must take and detain them, rather than returning them to their rightful owner.
Within two business days of performing any action referred to in (c) above, notify the Executive Office.
Financial institutions and DNFBPs also have the following obligations in addition to those mentioned above:
- Assist the Executive Office and the other supervisory agencies in confirming the veracity of the data submitted.
- Implement the decisions made by the UAE Cabinet and the UN Security Council, including when necessary, lifting specific financial sanctions.
- Decide and carry out internal policies and practices to guarantee adherence to the duties imposed by the Resolution.
- Policies and procedures that forbid employees from directly or indirectly reporting a targeted financial sanction or any other measure has been imposed against a customer or any other party.
- A person (natural or legal) who violates the responsibilities outlined in the Guidance and related legislation may be sentenced to imprisonment or fines of up to AED 5,000,000 or up to 50,000 AED per offense. Financial institutions and DNFBPs also face additional administrative penalties, such as losing their trade licenses, being barred from operating in the industry involved in the violation, and having the authority.
Conclusion
Under UAE law, there is also a practical analysis that determines whether the nature of a company's business activities presents a heightened risk of money laundering/terrorist financing, i.e., whether the company's business would make it simple to conceal illicit funds because it conducts financial activities on behalf of its customers, making it possible to conceal the ultimate beneficiaries and/or source of funds behind transactions. The DNFBP categories mentioned above and other types of enterprises that deal in high-value/liquid assets are generally linked to these increased risks (e.g., cash-based businesses or cryptocurrency). Even if a UAE individual does not satisfy all of the requirements above, their dealings in high-value or liquid assets that carry a higher risk of money laundering or supporting terrorism may nonetheless constitute a DNFBP.