Financial Sanctions

Financial Sanctions: A Multifaceted Approach to Combating Terrorism and Enhancing Economic Security

Financial sanctions represent a critical tool in the global fight against terrorism. By understanding how these sanctions intertwine with efforts to combat terrorism and Counter Terrorist Financing (CTF), stakeholders can better appreciate their role in preserving international security and economic stability.

Restrictive Measures Against Terrorism

The Council Regulation (EC) No 2580/2001 and Directive (EU) 2017/541 form the backbone of the European Union’s strategy against terrorism. These regulations enforce stringent measures, including the freezing of assets and prohibition of funds to individuals, groups, and entities involved in terrorist activities. They are instrumental in preventing the flow of financial resources to terrorist networks, thereby hindering their operational capabilities.

Economic Sanctions in Germany

Germany’s Foreign Trade and Payments Act, complemented by its Ordinance, underscores the nation’s commitment to global security. Sections 17, 18, and 19 of the Act, along with Sections 80, 81, and 82 of the Ordinance, provide a robust legal framework. They address economic sanctions, focusing on preventing unauthorized trade and financial transactions that could aid terrorist activities. These laws ensure compliance with international sanctions and contribute significantly to global counter-terrorism efforts.

Combating Terrorism Financing

The German Criminal Code (Section 89c) and the German Anti-Money Laundering Act (Section 1(2) GwG) collectively target the financing of terrorism. They criminalize activities related to the collection, provision, or acceptance of funds intended for terrorist purposes. This legislative approach is crucial in disrupting the financial networks that support terrorist operations.

Counter Terrorist Financing (CTF)

Counter Terrorist Financing (CTF) measures are designed to detect and prevent financial services from being exploited for terrorist purposes. They involve rigorous monitoring, reporting, and compliance mechanisms within financial institutions to identify suspicious activities. CTF is essential in ensuring that the financial sector does not become an unwitting facilitator of terrorism.

Guidelines on internal policies, procedures and controls to ensure the implementation of Union and national sanctions

General Provisions

Financial institutions must identify and assess areas vulnerable to restrictive measures and implement up-to-date policies and controls for compliance. These measures should be proportionate to the institution’s size and exposure to restrictive measures​​.

Governance Framework and the Role of the Management Body

Financial institutions need a governance framework to effectively implement restrictive measures. The management body should approve and oversee the strategy for compliance, being aware of the institution’s exposure and vulnerability to circumvention of these measures​​.

In single-person-directed businesses, this person may delegate management body functions to a senior manager. Group management bodies must ensure that all entities within the group have necessary resources to comply with restrictive measures​​.

For groups, each entity must conduct its own exposure assessment based on common methodologies reflecting the group’s specificities​​.

Role of the Management Body in its Supervisory Function

The management body in its supervisory role is responsible for overseeing the effectiveness of internal controls and governance frameworks for compliance with restrictive measures. They should be informed about the latest exposure assessment, oversee the adequacy of policies and procedures, and annually assess the compliance function​​.

Role of the Management Body in its Management Function

The management body in its management function should stay informed about the latest exposure assessment, adopt an appropriate risk management framework, approve adequate policies, ensure effective implementation of compliance processes, and promote a culture of compliance​​.

Role of the Senior Staff Member in Charge of Compliance

Financial institutions should appoint a senior staff member responsible for compliance with restrictive measures. This person should coordinate with internal control functions and have direct access to the management body​​.

The senior staff member is responsible for developing policies and controls for compliance, providing information to the management body, and overseeing the training program​​.

Conducting a Restrictive Measures Exposure Assessment

Financial institutions must conduct an exposure assessment to understand how different business areas are affected by restrictive measures. This includes assessing the applicability of different regimes, the likelihood of non-implementation or circumvention, the impact of breaches, and various risk factors like geographic, customer, product, and delivery channel risks​​.

Effective Restrictive Measures Policies and Procedures

Effective policies and procedures should enable full and proper implementation of restrictive measures without delay. They should include processes for staying updated on applicable measures, updating lists of regimes, ensuring relevancy of exposure assessments, and ensuring that policies and controls are commensurate with exposure​​.

Training

Financial institutions must provide training to staff on applicable restrictive measures, exposure assessment outcomes, and compliance policies. Training should be role-specific, timely, and adequate, and it may be conducted by the parent company in group settings​.

For more details please see:

EBA consults on Guidelines on internal policies, procedures and controls to ensure the implementation of Union and national sanctions
EBA-Guidelines on internal policies, procedures and controls to ensure the implementation of Union and national restrictive measures

Regulation on information accompanying transfers of funds and certain crypto-assets

Regulation (EU) 2023/1113, adopted on 31 May 2023, addresses information accompanying transfers of funds and certain crypto-assets, amending Directive (EU) 2015/849. This regulation aims to strengthen the fight against money laundering and terrorist financing, particularly in relation to the increasingly significant role of crypto-assets. It includes provisions to enhance transparency in fund transfers and crypto-asset transactions, ensuring that such transfers can be effectively monitored for illicit activities.

Key aspects include:

  1. Scope Expansion: Extends the scope of Regulation (EU) 2015/847 to cover transfers of virtual assets. It aims to regulate virtual asset service providers to facilitate traceability of virtual asset transfers, ensuring that these providers accompany transfers with information on originators and beneficiaries.
  2. Combatting Illicit Money Flows: The regulation is part of efforts to combat money laundering and terrorist financing by ensuring transparency in fund transfers and virtual assets. It seeks to safeguard the integrity, stability, and reputation of the financial sector and the internal market against the misuse of transfers for criminal or terrorist purposes.
  3. Risk-Based Approach and Enhanced Due Diligence: The regulation emphasizes a risk-based approach and imposes enhanced due diligence requirements. It mandates that service providers, including those for virtual assets, should have internal policies and controls to implement restrictive measures effectively.
  4. Data Protection Compliance: The regulation stipulates that the processing of personal data must comply with existing data protection laws, emphasizing the protection of personal data against misuse.
  5. Implementation and Oversight: The regulation sets forth guidelines for the implementation and enforcement of its provisions, aiming to ensure effective compliance and supervision by competent authorities.

This regulation represents a significant step in aligning EU legislation with international standards for combating money laundering and terrorist financing, particularly in the rapidly evolving area of virtual assets and their transfers.

Guidelines on Internal Policies, Procedures, and Controls to Ensure the Implementation of Union and National Restrictive Measures under Regulation (EU) 2023/1113

General Provisions

PSPs and CASPs Compliance: Payment Service Providers (PSPs) and Crypto-Asset Service Providers (CASPs) must establish policies, procedures, and controls to comply with restrictive measures according to EBA Guidelines. These measures should enable PSPs and CASPs to identify subjects of restrictive measures, prevent transactions or services prohibited by these measures, and manage circumvention risks.

Restrictive Measures Screening

Effective Screening Systems: PSPs and CASPs are required to implement effective screening systems to identify targets of restrictive measures as specified in Section 4.4​​.

Choice of Screening System

Selection Based on Exposure Assessment: The choice of screening system should be based on the PSPs’ and CASPs’ exposure assessment and adapted to their business size, nature, and complexity​​.

Performance Review: PSPs and CASPs should regularly review the performance of their screening system, at least annually, to ensure its effectiveness in identifying targets of restrictive measures​​.

List Management

Policies and Procedures for List Updates: PSPs and CASPs should have policies to identify when new restrictive measures are adopted or existing ones are updated or lifted, and procedures to update their internal data sets accordingly​​.

Defining Data for Screening

Data Types for Screening: PSPs and CASPs must define the types of customer data to be screened for each type of restrictive measure, ensuring the data is accurate, up-to-date, and detailed enough to establish if a party is subject to restrictive measures​​.

White Listing: They may ‚white list‘ persons not subject to restrictive measures to avoid false alerts, with immediate reviews of these lists when new measures are published or customer information changes​​.

Screening the Customer Base

Regular Customer Database Screening: PSPs and CASPs should screen their entire customer database regularly and determine the frequency of screening based on their exposure assessment​​.

Trigger Events for Screening: They must define trigger events for screening, such as changes in designations or new restrictive measures, customer onboarding, significant changes in customer due diligence data, or suspicion of circumvention attempts​​.

Screening of Transfers of Funds and Crypto-Assets

Screening Before Completion: All transfers of funds and crypto-assets must be screened before completion, involving screening all parties against restrictive measures-related lists​​.

Calibration

Calibration of Screening System: PSPs and CASPs should determine the calibration settings of automated screening systems to balance alert quality and compliance with restrictive measures​​.

Reliance on Third Parties and Outsourcing

Outsourcing Policies: PSPs and CASPs must have policies defining which restrictive measures procedures are carried out in-house or outsourced, maintaining ultimate responsibility for compliance regardless of outsourcing​​.

Due Diligence and Verification Measures for Alert Analysis

Management and Analysis of Alerts: Policies should be in place for investigating alerts to confirm if they are true positive matches and to determine necessary actions​​.

Freezing and Reporting Measures

Suspension and Freezing: PSPs and CASPs should have procedures to suspend operations and freeze funds or crypto-assets when a match with a subject of restrictive measures is identified​​.

Ensuring Ongoing Effectiveness of Screening Policies, Procedures, and Systems

Regular Testing of Screening System: PSPs and CASPs must regularly test their screening system to ensure it remains appropriate and effective in light of their exposure assessment​​.

For more details please see:

EBA consults on Guidelines on internal policies, procedures and controls to ensure the implementation of Union and national sanctions
EBA-Guidelines on internal policies, procedures and controls to ensure the implementation of Union and national restrictive measures

Conclusion

The synergy between financial sanctions, laws against terrorism financing, and CTF measures creates a formidable barrier against terrorism. By understanding and implementing these strategies, governments and financial institutions can contribute significantly to maintaining global peace and economic security.

Sources:

Foreign Trade and Payments Act (Außenwirtschaftsgesetz – AWG)

https://www.gesetze-im-internet.de/englisch_awg/index.html

Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung – AWV)

https://www.gesetze-im-internet.de/englisch_awv/index.html#gl_p1108

Section 89c German Criminal Code (Strafgesetzbuch – StGB) – Financing of terrorism

https://www.gesetze-im-internet.de/englisch_stgb/englisch_stgb.html#p0985

German Anti-Money Laundering Act (Geldwäschegesetz – GwG)

https://www.bafin.de/SharedDocs/Veroeffentlichungen/EN/Aufsichtsrecht/Gesetz/GwG_en.html

https://www.bafin.de/SharedDocs/Downloads/EN/Aufsichtsrecht/dl_gwg_en.html

Council Regulation (EC) No 2580/2001 of 27 December 2001 on specific restrictive measures directed against certain persons and entities with a view to combating terrorism

https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A02001R2580-20220413

Directive (EU) 2017/541 of the European Parliament and of the Council of 15 March 2017 on combating terrorism and replacing Council Framework Decision 2002/475/JHA and amending Council Decision 2005/671/JHA

https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32017L0541

Deutsche Bundesbank – Financial sanctions

https://www.bundesbank.de/de/service/finanzsanktionen

Deutsche Bundesbank – Sanctions regime

https://www.bundesbank.de/de/service/finanzsanktionen/sanktionsregimes

Overview of the sanctions imposed in capital and payment transactions.

Deutsche Bundesbank – Frequently asked questions about financial sanctions

https://www.bundesbank.de/resource/blob/886614/d23c7002f5aed9e9fdcea61c19a4092a/mL/faq-finanzsanktionen-data.pdf

Regulation (EU) 2023/1113 of the European Parliament and of the Council of 31 May 2023 on information accompanying transfers of funds and certain crypto-assets and amending Directive (EU) 2015/849

https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32023R1113