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Cost of complying with economic sanctions increases as number targeted approaches record levels


UK banks are facing unprecedented compliance costs as the number of organisations and individuals subject to economic sanctions by the international community continues to increase, an expert has said.

The number of sanctions imposed by the UK rose by 3% in the year to July 2015, from 2,401 to 2,477, according to figures obtained by Pinsent Masons, the law firm behind Out-Law.com. The figure is the highest number of active sanctions imposed by the UK in three years and is approaching the record 2,991 reached in 2011, according to Tom Stocker, a corporate compliance expert at the firm.

"As the number of sanction targets increases, the compliance burden on banks has become difficult to control," he said. "However, banks have no choice but to increase their focus on compliance as any mistakes in this area raise the risk of severe fines, from the UK and other jurisdictions that may have imposed a sanction against that client."

Iranian organisations and individuals currently account for almost a quarter of all sanctions listed by the Home Office, with 646 included on the list. However, there is the potential for many of these sanctions to be revoked if the EU-wide sanction programme is lifted following agreement by Iran to limit its nuclear activity as announced last month. The country with the biggest percentage increase in sanctions issued by the UK was Ukraine, where 204 individuals and organisations are now subject to sanctions – a 58% increase from the 129 listed in 2014.

Economic sanctions are used by the international community to restrict financial transactions or impose trade barriers against governments that are in breach of international law. They are also used to undermine the operations of terrorist organisations. Banks and other organisations are prohibited from performing any kind of financial service for individuals or organisations that are targeted by sanctions.

Stocker said that UK banks not only have to ensure that they uphold sanctions against individuals and organisations on the UK's list, but that they also have to abide by sanctions imposed in any other jurisdiction in which they operate. This means that they have to complete thorough due diligence on the backgrounds of thousands of their clients' current and potential contacts, he said.

He said that in the case of RBS, this had involved the recruitment of 730 new staff to its anti-money laundering and sanctions compliance function between June 2011 and December 2013, to ensure that they had the resources to fully comply with the rules. The penalties for non-compliance can be  severe, as in the case of Germany's second largest bank Commerzbank which recently had to pay a fine of $1.45 billion to the US government over transactions with sanctioned companies in Iran and Sudan, he said.

The world's largest economies including the EU, US and China announced last month that they had agreed with Iran to lift trade sanctions in return for limits on the country's nuclear programme. Sanctions will be removed once the independent International Atomic Energy Agency verifies that Iran has implemented agreed measures to reduce its nuclear-related activities, which is not expected to happen until 15 December 2015 at the earliest.

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