The guidance (2 pages / 449KB PDF) poses ‘frequently asked questions’ and makes clear that the Commission expects firms that are bound to comply with the EU’s sanctions regime to have a sanctions compliance programme in place and to perform their own due diligence and sanctions screening as part of such programme.
Reflecting previous Commission guidelines, the document encourages businesses to take a ‘risk-based’ approach. The Commission has not been prescriptive on what this entails, and has left much to the discretion of firms. It is for each firm to develop, implement, and update its own risk-based sanctions compliance programme taking into account its own circumstances including its business model, the countries that it operates in, the sector it operates in and previous relevant risk assessments performed, including those done on customers and employees.
Stacy Keen, sanctions expert at Pinsent Masons, said: “This guidance itself does not introduce any legal obligations, nor is there any such obligation in the sanctions regimes themselves to undertake due diligence and screening. However, the guidance confirms that the Commission considers such due diligence and screening necessary where warranted by the particular risk profile. Failure to conduct due diligence and screening will not result in liability or penalties, but such a failure will considerably reduce a firm’s ability to put forward a successful defence or mitigation if it is faced with an allegation of breaching financial sanctions.”
“Due diligence is presented as good business practice by the Commission. It is noteworthy that the Commission states that assessing the beneficial ownership of a counterparty is a ‘due diligence duty’,” she said.
The Commission has provided some direction on what it expects firms to do as part of their risk-based compliance due diligence. In this regard, the Commission has indicated that “multi-level due diligence” may be required. Whilst the Commission confirms that firms should screen third parties against sanctions lists, it indicates that in addition to this firms may need to conduct adverse media investigations to determine whether a counterparty is owned or controlled by someone that is sanctioned.
Corporate compliance expert Edward James of Pinsent Masons said: “In doing so, the Commission has pointed out a key risk for firms. This risk is that some counterparties may pass sanctions screening but still be owned or controlled by a sanctioned - or ‘designated’ - person. The Commission clearly does not believe there is a ‘one-size-fits-all’ approach or that doing adverse media investigations to determine ownership and control will always be necessary. Whether or not such searches should be done should be based on the risk-based approach developed by firms.”
Thorne Godinho, forensic intelligence expert at Pinsent Masons, said: “Sanctions due diligence and assessing beneficial ownership can be a complex endeavour given the often-opaque nature of Russian corporate structures. The guidance is useful because it confirms that screening third parties against sanctions lists may not identify parties that are indirectly hit by sanctions. As such, in higher risk scenarios specific specialist advice and support is recommended.”
“Whilst the guidance published by the Commission does not create legal obligations, firms that fall under the EU’s sanctions regime should take note of what the Commission expects of them. To avoid falling foul of these expectations, firms should ensure that their sanctions compliance programmes are risk-based and cater for different levels of scrutiny for different levels of risk,” James said.