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[ ASPECTS OF APAC ]
On July 2, 2018, after the corporation promised to pay a $1 billion fine and put another $400 million in escrow, the U.S. Commerce Department temporarily and partially lifted the export ban.7
Strict civil and criminal liabilities in the field of sanctions result in high costs of sanctions compliance risk, and the expected risk may be far beyond what many entities can handle. As a result, some banks refuse to accept any business involving Specially Designated Nationals, even if their customers can provide the Office of Foreign Asset Control (OFAC) licenses or prove that they are not within the scope of the 50 Percent Rule.
Conflicts between laws of different countries
In 1996, largely as a countermeasure to the U.S. extraterritorial sanctions against Cuba and Iran, the EU passed Regulation (EC) No. 2271/96 to ban member states from complying or assisting the U.S. in enforcing the restrictions imposed under these sanctions. This is referred to as the blocking statute.
In March 1997, a Canadian Walmart subsidiary removed pajamas that were made in and imported from Cuba from its shelves. Walmart was faced with a dilemma because Canada’s blocking regulation prevented the Canadian subsidiary from removing the pajamas lest it face potential penalties of up to C$1.5 million ($1.2 million) for
noncompliance with Canada’s counter- measures. It decided that the risk of liability was greatest from the Canadian government and as a result, it restocked the Cuban-made pajamas after disclosing the incident to OFAC and paying a fine of $50,000.
When dealing with the issue of sanctions compliance, banks may face a dilemma. But some jurisdictions provide a channel for compliance or relief from sanctions or blocking statutes issued by them. For example, OFAC allows entities to disclose violations voluntarily and promises to make self-disclosure one of the consider- ations for mitigating penalties.8
China issued its own “blocking regulation” in 2021, but the regulation has not been officially adopted. It imposes new restrictions on Chinese enterprises (and foreign ones operating in China), resulting in a potential dilemma that once beset EU and Canadian corporations.
Featuring complicated manifestations
In the monitoring system, certain state-owned Chinese groups have recently noticed that tougher sanctions by the U.S. administration on China leave some of their branches listed as “a sanctioned entity, or owned by a sanctioned entity.” Given that these groups ban their branches (including affiliated banks, securities and insurance companies) from transacting with sanctioned entities, a great challenge may be posed to the overall sanctions compliance risk management, where adherence to original policy leads to the embarrassment of “prohibiting transac- tions with itself,” yet removal of the policy impairs the efficiency of risk management.
Efficient sanctions compliance management does not stem from a one-size-fits-all judgment. Under the increasingly complex sanctions framework, every transaction must be considered in accordance with the context of sanctions terms, business
background and risk tolerance of the enterprise. Are Chinese banks equipped with enough competent personnel? Do these professionals enjoy necessary knowledge structure? Can Chinese bankers develop courage to break through “exiting” strategies? These questions should be answered with great effort in the immediate future.
Conclusion
Defining risk is only the start of risk management and sanctions compliance risk is no exception. A foundation for sanctions compliance risk management in the banking industry should be established. While the study of risk itself is only a start, taking internal control measures to manage risk is essential in risk management and may serve as another new topic worth studying at the theoretical level.
Junchen Huang, CAMS, CGSS, executive, AML Office, Compliance Department, China CITIC Bank, Nanjing Branch, Jiangsu, China, huangjunchen_nj@citicbank.com
1 Peter C. Fishburn, “Foundations of Risk Measurement. I. Risk as Probable Loss,” Management Science, https://www.jstor.org/ stable/2631428?seq=1
2 Gert van der Pijl, (IT)Auditing, Risk in theory-Lessons for our practice[R]. Nanjing: Nanjing Audit University, 2012.
3 “Course for Qualification Certificate of CGSS [M],” ACAMS, Version1.1, 2020.145
4 “Chinese banks deny being probed for breaking North Korea sanctions,” China Plus, June 26, 2019, http://chinaplus.cri.cn/news/ business/12/20190626/308200.html.
5 “Course for Qualification Certificate of CGSS [M],” ACAMS, Version 1.1, 2020.91-92.
6
Sun Caihua. Precaution against American Economic Sanctions: Pragmatic Guideline and Case Analysis [M]. Version 1. Beijing: China Daily Press, 2020.101-106.
7 “Course for Qualification Certificate of CGSS [M],” ACAMS, Version 1.1, 2020.99-100.
8 “Course for Qualification Certificate of CGSS [M],” ACAMS, Version 1.1, 2020.24-25.
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