The UK has launched a new sanctions regime following Brexit, underlining the fragmented nature of the international sanctions framework
At the height of the Brexit tensions last year, anti-corruption campaigners expressed concern that the UK might be seen as soft on corruption once it left the European Union. Inside the EU, after all, the UK had to participate in the bloc’s sanctions regime, implementing and policing sanctions against any individual or organisation targeted. After Brexit, would the UK feel less pressure to target corruption, money laundering, fraud and similar financial crimes, particularly given its explicit desire to reduce red tape?
Foreign Secretary Dominic Raab will point to an announcement in late April as a rejection of such fears. The UK Government has not only brought in its own Global Anti-Corruption Sanctions Regime, the Foreign Office announced, but also used it straight away to target 22 individuals.
The sanctions were imposed on individuals involved in notorious corruption cases in Russia, South Africa, South Sudan and throughout Latin America, and include asset freezes and travel bans. Organisations that might have dealings with individuals on the list, including banks and other financial services businesses, will have to implement the sanctions wherever they are relevant.
Another set of rules to comply with
The UK’s announcement may ease anti-corruption campaigners’ nerves, but the emergence of this new regime is a reminder of the highly fragmented nature of the international system of sanctions. Currently, only the United Nations Security Council has powers to impose sanctions that automatically apply across its entire membership; outside of these rare instances, the system depends on a patchwork quilt of decisions made by governments and regulators in individual countries or regions.
For those charged with complying with the sanctions, this is potentially troublesome. They must be confident they are monitoring sanctions imposed in multiple jurisdictions and behaving accordingly. Sanctions typically apply on a global basis so the demands of, say, the UK must be accommodated in every market where a business has dealings.
Sanctions monitoring and compliance has therefore become a crucial element of banks’ anti-corruption work, including in their anti-money laundering systems and processes. But the burden continues to grow.
One interesting aspect here is the role of sanctions in international diplomacy, where the nuances of relations and balances of powers are constantly shifting. The UK’s launch of a sanctions regime that operates independently of the EU’s regime has not gone unnoticed in the US, which moved quickly to welcome the initiative. It also announced sanctions of its own on some of the individuals targeted under the UK’s first independent sanctions, a clear signal of approval for the UK approach.
For the UK, that US approval is very welcome, given the intention of the British government to build stronger relationships with America now it has left the EU – in particular, it wants a swift trade deal. But the US needs the UK here too; the Biden administration is committed to a far more multilateral approach to international affairs than its predecessor, and it sees alliances with the UK has helpful in stirring the EU into action on key issues.
Indeed, the EU is often regarded as more cautious and conservative by the US, but President Biden’s team recognise that the EU are now competing with the UK for their attention. On sanctions, as in other areas, EU officials may now be anxious not to be left behind by a UK-US bilateral relationship.
Where one leads, others will follow
For those potentially on the end of sanctions – and the financial services industry, as it strives to keep on the right side of the law – these coalitions and alliances are significant. The announcement of sanctions in, say, the UK, is very likely to take place in concert – or at least to be followed swiftly by – with US and EU regulators.
This only adds to the regulatory burden facing banks and others as they apply know-your-customer and anti-money laundering rules. Sanctions applied in the UK, say, are already far-reaching, in that banks know they apply throughout their global businesses. But in addition, they can expect similar sanctions to be brought in by regulators elsewhere – and they may be applied in different ways with different requirements.
For governments, the debate around sanctions is often political as well as motivated by a no-doubt genuine desire to crack down on corruption. Governments may choose to follow one another’s lead as part of broader efforts to build alliances and curry favour. Equally, a government may choose not to follow sanctions imposed elsewhere; that sends its own signals.
The financial services sector, by contrast, has no choice about whether to comply when governments decide to act. For banks and other businesses covered by financial crime regulation, know-your-customer rules and anti-money laundering requirements, the only decision is about how to build a compliance system that efficiently and effectively reduces the risk of a damaging breach.
Over time, that is becoming harder. The scale of the fight against international corruption is both larger and more complex. And the patchwork quilt approach to regulation and compliance makes life difficult, requiring banks and others to cope with inconsistency and uncertainty.
Manual processes and systems are increasingly struggling to cope in these circumstances, requiring investment in new technology. In an era where the demands of anti-corruption regulation are only going to increase, automation tools, alongside solutions harnessing machine learning and artificial intelligence to step up protection, will become ever more vital.