However, as sanctions are applied more often and extended over longer periods of time, it is unclear if the sanctions actually have the desired impact on the behavior in question or if the harms ultimately outweigh the good.

The term sanction is often used in a way that would lead one to believe it is just a single action, like stopping trade between businesses. On the contrary, sanctions are generally issued as programs based on the nature of the offending action and the current diplomatic status of the targeted country.

There are seven basic types of sanctions: economic, diplomatic, military, sports, individual, environmental, and United Nation Security Council (UNSC) sanctions. Any of these sanctions can be used to deter or reprimand countries for anything from human rights violations to smuggling drugs or human trafficking. The more egregious the action (or inaction) by the offending country, the more countries and organizations that will utilize their own sanctions program. The idea is that when a country or its economy is isolated by sanctions, it cannot afford to continue the behavior that led other countries to enacting these measures.

Narges Bajoghli, anthropologist and assistant professor of Middle East Studies at Johns Hopkins University’s School of Advanced International Studies, expounds on the two major ways sanctions affect change. “Either they’re supposed to put enough pressure on the regime and targeted state to change its behavior, or they’re supposed to put enough pressure on society to rise up against the state to then topple the state,” Bajoghli explains, adding that in either example, sanctions serve as a passive, but coercive tactic.

“Either [sanctions are] supposed to put enough pressure on the regime and targeted state to change its behavior, or they’re supposed to put enough pressure on society to rise up against the state to then topple the state.”

— Narges Bajoghli

Agathe Demarais, in her bookĚý stated: “The reality is that sanctions are sometimes effective, but most often not, and it is hard to accurately predict when they will work… on one end of the response spectrum, it could make a strongly worded statement, which might feel like too little, and on the other end of the diplomatic spectrum, you have military interventions, deadly, costly, and unpopular. Sanctions fill the void in between these two extreme options.”

Choosing the type of sanction

The U.S. Treasury Departments’ administers and enforces sanctions programs against target groups. The two main types of sanctions lists maintained by OFAC are the Specially Designated Nationals (SDN) list, a list of individuals and companies in countries targeted by US sanctions; and the Consolidated Sanction Lists, which contain details about restricted parties not covered by the SDN list. In the US, these list help to track the sanctions programs and prevent people from unwittingly doing business with sanctioned actors. They also hold financial institutions accountable and remove financial advantages from doing business with these entities and individuals.

Two of the most recent examples of sanctions are the ones levied against Iran and Russia. These sanctions programs impact the countries and some individuals or entities doing business with or profiting from these countries, whether directly or indirectly. However, these are far from the only active sanctions enacted by the US at this time. The US currently has 32 active programs that sanction organizations or countries (and the individuals associated with them) for infractions like their support of terrorism, narcotics trafficking, weapons proliferation, or human rights abuses, according to the .

To illustrate, the program levying sanctions against Cuba is one of the oldest used by the US, with some iteration of the sanctions being active since 1962. The longevity of Cuban sanctions program suggests it is not achieving its intended goals; moreover, there are concerns that the sanctions actually limit humanitarian aid into the country. By almost any measure, the US sanctions program directed at Cuba has questionable effectiveness, and the longer the program continues, the more it requires review and consideration.

While the sanctions program against Russia was initiated more recently after that country’s invasion of Ukraine in February 2022, the sanctions have not fully curtailed the current military action it sought to cease. The impact of these sanctions has not been as immediate as originally hoped, even though cutting certain aid and restricting trade creates some of the intended immediate reactions. However, this is an example in which the sanctions program appears to be becoming more effective as other nations and multinational companies join in to enact their own sanctions.

It is important to note that the more countries that join in on a sanctions package, the more effective it will be. If countries or humanitarian organizations decline to joins a sanctions program, their continued contribution to the target country’s economy softens the blow to the population and the government, making it more difficult to create a situation that forces change.

You can learn here.

Challenge 5: Economic slowdown in China

For the first time in decades, it looks like China’s economic sprint is seriously slowing down, a worrying sign for a global economy that has been reliant on China’s nearly 1.5 billion people to propel its broader development. It is also a situation with wide ranging implications across the political and security sphere, meaning the possible ramifications of a Chinese slowdown is a necessity to understanding how 2024 may develop.

You can download the Reuters app and listen to the , which brings you everything you need to know from the frontlines in 10 minutes, every weekday.

One of the most pressing issues China is facing is the rise of youth unemployment. The of youth unemployment data showed a jobless rate at a high of 21.3%, with a corresponding increase in the rate at which students returned to rural homes within six months of graduation, . A high youth jobless rate not only slows down potential future growth and allows expensively earned skills to atrophy but could generate social pushback against a government which has a deep and troubled history around student movements.

From a more sectoral perspective, real estate, which accounts for about , is also facing a severe crisis. The debt-laden property giants and have highlighted a sector that had defaulted on $124.5 billion (US) worth of bonds as of October, generating fears of a domino effect on the financial system and the broader economy. But unlike many other nations’ real estate markets, China’s is also a key part of how local governments and state firms raise capital. The result is that, if the real estate sector goes bust, China could be facing a combined crisis in a large part of its economy — the decimation of its people’s savings — while at the same time seeing one of its core local fundraising elements go bust. Economic slowdowns after long periods of growth are already difficult enough as is, but this could be disastrous, turning a case of economic sniffles into a much more consequential collapse.

The risk of international contagion, of a failing Chinese economy pulling down the , is extremely high. As of 2023, for almost 19% of global GDP (PPP), compared to the United States’ 15% share. And because China and the United States take up an inordinate share of global GDP, a global recession could be brought about by the weakening of either country. China’s outsized share of global manufacturing puts a situation on the table where a China-centered spiraling cascade through the international supply chain could again spur a global surge of inflation.

For the first time in decades, it looks like China’s economic sprint is seriously slowing down, a worrying sign for a global economy that has been reliant on China’s nearly 1.5 billion people to propel its broader development.

Of course, the Chinese government is not ignorant of these dangers and have made large efforts trying to contain the and prevent a , but it must play a dangerous game of bailing out some players while preventing others from taking advantage of the safety net and making matters worse. Early signs areĚý that China is managing the crisis, but this is a long game in which the laws of economics viciously punish even slight missteps.

This is where the security and international relations spillover beings. It is only the beginning of President Xi Jinping’s third (unprecedented) term as Chinese president, yet he has multiple ongoing and interconnected issues that he will have to balance while also defusing China’s economic timebomb. A war in Ukraine fought by one of the countries primary allies/proxies is going poorly for Russia. At the same time, China is in the middle of a growing geopolitical rivalry with the United States and other western powers, not to mention the regional powerhouses of India, Japan, and South Korea.

The economic risk for China at home and a potential for costly sparring with geopolitical rivals could go multiple ways in 2024. One possibility is that President Xi becomes less willing to push aggressively on foreign policy while domestic politics are so shaky — . On the other hand, people tend to double-down when backed into a corner and an economic malaise may make other forms of growth (such as military conquest or simply more aggressive foreign policy) the only way to continue advancing China’s interests.

When it comes to the potential for an economic slowdown or a more vicious scenario, operational flexibility and situational awareness may not be enough for companies and organizations. The good news is that there is no need to wing it when it comes to dealing with such large-scale challenges. Events like China’s slowdown have had numerous warning signs over the last few years, allowing those organizations that are informed to prepare now rather than adapt later. For example, preparing a roster of alternate suppliers, identifying key areas of exposure, and having step-by-step instructions ready for when timely responses are required can be the difference between floundering in the moment and executing a vital repositioning.

Challenge 6: Wars and shadow wars

The return of warfare between equal or similar adversaries in 2022 shattered the global community’s assumption that such wars were a relic of the past. In 2023, it now appears that this new dynamic is here to stay, with countries and non-state actors more often using violence as a means of settling conflicts and reaching political goals.

Arguably the initiating dispute to this reawakening — Russia’s war in Ukraine — continues on. While international support for Ukraine was high in the wars’ initial year, 2023 has seen . Aid to the country has tapered off, especially in the United States where support has become a political wedge issue that has resulted in and unless support from the US and NATO is vastly increased, the quagmire is likely to continue.

Arguably, the bulk of the ongoing war’s impact has already been felt, but this is merely the active conflict. However, it is accompanied by another shadowy fight taking place globally. Rather than a direct encounter, Russia often operates using , a type of shadow warfare that overlaps with disinformation campaigns, efforts to subvert elections, and other types of indirect combat that have since spread beyond Ukraine. and are currently seeing their domestic politics strained to the breaking point under similar tactics that could see them pulled more directly into the war, something which increases the likelihood of NATO itself being dragged into the conflict.

In addition, the latter half of 2023 ushered in a Middle Eastern situation that has the potential to not merely impact regional actors but to spiral out of control to the point where global players would inevitably be pulled in. After the October 6 attack on Israeli citizens by Hamas, the Israeli military has been embroiled in an , with fighting in the Gaza Strip, , as well as repelling and , the violence has already spread far beyond Gaza.

In such a dangerous world, businesses and organizations will inevitably be swept up in some kind of geopolitical or economic fallout that will pose an existential threat.

The situation is currently being escalated by the Iran-backed Houthis of Yemen who are , the vital shipping lane connected to the Suez Canal. The use of these proxy forces is how Iran exerts its influence without directly involving itself in the conflict and is another way of waging shadow wars that cause chaos and disruption in other countries. Even more troubling, major players such as the US and China have massive interests in the trade that flows through this area of the world, meaning that they could be pulled into a multi-axis shooting war if the conflict were to spread into areas like the Strait of Hormuz.

Any further discussion of a potential battle between the superpowers needs to include a look at Taiwan, where the question is increasingly becoming armed combat will break out. The good news is that Taiwan is unlikely to become a battlefield in the new year but preparation for an eventual conflict is likely to be a large factor dominating local politics and security concerns. Interestingly, the prelude to a war over Taiwan’s independence is also playing out in semiconductor manufacturing. Despite Taiwan’s tense security concerns, it remains the manufacturer of the , vital technology for both electronics and increasingly important for advances in artificial intelligence (AI). With such a vital hub of world production in the crosshairs of a superpower conflict, it may be unsurprising that nations such as the US and China are competing as well as to .

All of these circumstances, from Ukraine to the Middle East to Taiwan, revolve around the new power axis of the 21st century, with a clash between eastern and western powers. So far this is mostly playing out in shadow wars, the efforts of misinformation around democratic elections, the trade wars involving already strained economies, fighting for natural resources and the challenging impact of AI — all of which are acting as proxies that have powerful nations once more fighting over influence. The post-Soviet era of relative peace and international order seems to have expired in 2023, with a return to the kind of jostling that defined much of the 20^th century.

In such a dangerous world, businesses and organizations will inevitably be swept up in some kind of geopolitical or economic fallout that will pose an existential threat. Drafting, reviewing, and updating contingency plans and crisis-response protocols can give organizations a leg up an increasingly complex world. Going even further as to actually test such plans can teach hard lessons now rather than when organizations cannot afford to pay the cost. This grants the opportunity to focus not simply on the inevitable challenges of 2024, but the equally inevitable opportunities that all years bring.

Our colleagues at Reuters are covering these and other crucial stories every day, and you can keep up with the best international reporting from around the world at .

To that end, in a new three-part blog series, each covering two of these major challenges, we will offer business professionals and governments the insight to better navigate what 2024 may have in store.

Challenge 1: Democracy under attack

Democracy, the system of government that allows people to choose their leaders and hold them accountable, . While this has been a years-long development, 2024 will be a particularly straining year, as more than 50 countries and regional bodies are experiencing major elections in the upcoming year, with four in particular that could have significant global impacts.

One of the most watched and consequential elections will be the presidential race in the United States, where incumbent Joe Biden will seek a second term against a (highly likely) challenge from former president Donald Trump, who has refused to concede his defeat in 2020. It will be a decisive moment for the future of American democracy, which has been eroded by partisan polarization, misinformation, voter suppression, and attacks on the integrity of the electoral system.

You can download the Reuters app and listen to the , which brings you everything you need to know from the frontlines in 10 minutes, every weekday.Ěý

Another key election will be in India, the world’s largest democracy, where Prime Minister Narendra Modi will seek a third term in office. Modi, who leads the Hindu nationalist Bharatiya Janata Party, has been accused of undermining India’s secular and pluralistic traditions, cracking down on dissent, and enacting controversial laws that discriminate against Muslims and other minorities. An effort by the government to — in a democracy already struggling with diversity — has only generated further concerns. Modi’s popularity, however, remains high among his supporters, who credit him with delivering economic growth, fighting corruption, and standing up to China and Pakistan. The 2024 Indian election will determine whether Modi can consolidate his power and agenda, or whether the opposition parties can mount an effective challenge and offer an alternative vision for the country.

The impact of these elections on geopolitics, global business, and society will be enormous, potentially shaping the policies and priorities of some of the world’s largest and most influential economies.

Other elections will also have important ramifications for the region and the world, as they will reflect the state of democracy and governance in their respective countries, as well as their relations with other powers. For instance, Taiwan will continue to be a flashpoint for US-China relations, as the island which China sees as its sovereign territory prepares for a democratic election in mid-January. Outgoing president Tsai Ing-wen’s Democratic Progressive Party seeks to defend her pro-independence stance and resist pressure from Beijing and the opposition party, the Kuomintang, in an election where is expected.

The election in Indonesia, the world’s largest Muslim-majority country and a rising economic power, will be a test of its democratic resilience and its role in Southeast Asia. The outgoing President Joko Widodo, who has served as the nation’s president since 2014, will be stepping aside as he reaches his term limit. His legacy of his Defense Minister Prabowo Subianto, whose vice-presidential running mate is Gibran Rakabuming Raka, the eldest son of President Widodo. Indonesia, for all of its growing power is a very young and thus relatively untested democracy, and it will have an important decision to make for Joko Widodo’s successor in an election already on all sides.

The impact of these elections on geopolitics, global business, and society will be enormous, potentially shaping the policies and priorities of some of the world’s largest and most influential economies. Alliances, trade agreements, and joint ventures are all dependent on the outcomes of these elections and what they say collectively about a prominent style of government.

Given the significance of these elections, it is crucial for business leaders to monitor and understand the political dynamics in these countries, as well as how they will affect the regional and global landscape. A proactive and informed approach to engaging with these democracies will not only help businesses mitigate the risks and uncertainties, but also allow them to seize the opportunities that these events offer.

Challenge 2: A fracturing global economy

Four years after the outbreak of the global pandemic, the international economy remains fragile and uncertain. The pandemic exposed and exacerbated the structural weaknesses and vulnerabilities of an interconnected global economy, one which is beginning to splinter into rival blocs. While potentially in only its early stages, the off shoring, re-shoring, and all-around realignment of global trade between these blocs is going to have a major impact on the world. Supply chains will be reshaped, relationships between companies will have to adapt, and new competitions will undoubtably emerge.

A core challenge facing the global economy going into 2024 continues to be, of course, inflation. In 2024, the inflation rate likely will fluctuate across countries and regions, depending on their economic conditions, policy responses, and external shocks. According to the , the global inflation rate is projected to be 5.8% in 2024, with core inflation not expected to return to target levels of around 2% until 2025. However, this global average masks significant differences among countries and regions. For instance, advanced economies are expected to see inflation of less than 3.0% in 2024, after averaging 4.6% in 2023. (Note: The 2023 figures are IMF projections for the full year given three quarters of data. Final growth figures for 2023 may deviate slightly from these projections.)

In light of this, the United States across the globe, but that is counterbalanced by and an especially sickly .

The inflation dynamic in 2024 will have important implications for the global economy, as it will affect exchange rates, interest rates, asset prices, income distribution, and the debt sustainability of many countries and regions.

Emerging market and developing economies, however, are expected to see 7.8% inflation on-top of the 8.5% inflation they saw in 2023, a significant struggle for nations that were already harder hit by the pandemic. Indeed, some countries such as Argentina, Turkey, and Egypt experiencing inflation at double- and even triple-digit rates.

The inflation dynamic in 2024 will have important implications for the global economy, as it will affect exchange rates, interest rates, asset prices, income distribution, and the debt sustainability of many countries and regions. It will also pose challenges and opportunities for businesses and professionals, which will have to adapt to the changing price levels and expectations while managing the associated risks and uncertainties.

Add to this worrisome economic picture the , the world’s second-largest economy and the largest trading partner of many countries and regions. China has been the main engine of global growth for the past four decades; however, its growth model — which relies heavily on investment, exports, and debt — may have reached its limits. Now, the country is facing multiple headwinds, such as an aging population, high unemployment among younger workers, declining productivity, and environmental and real estate crises. China’s slowdown will have a cascading effecting into foreign policy and other key interest areas, the full extent of which will depend on the responses of its government to the challenge.

Meanwhile, the world’s largest economy, the United States, seems to be better off, with greater optimism among its business leaders, even if the general public remains somewhat pessimistic. With slowing inflation and a historically strong labor market helping to lift real income, the nation’s economic fundamentals appear steadier than at any time since before the pandemic. Still, the US must dodge still-latent and crises, or any other major recession trigger. Yet even then the country may still slip into an economic malaise simply because consumers have convinced themselves of its inevitability. If it remains resilient, however, a strong US economy could send positive ripples across the business and political world.

Conclusion

In 2024, democracy will be under stress, as authoritarian leanings will seek to make a mark in upcoming elections and populist movements challenge the established institutions. At the same time, the global economy is likely to face multiple challenges and uncertainties, as well as some opportunities for recovery and resilience.

While these are major challenges — and only two of the six largest factors we’ll be covering in this series — we have to acknowledge that unforeseen occurrences can rapidly shift the state of the world, and are in fact, becoming alarmingly common. An assassin’s bullet, a heart attack, a natural climate disaster, a war, or even another pandemic, can impact the world in ways that cannot be predicted.

As such, organization leaders need to maintain the flexibility they were forced to develop during the pandemic as part of a plan of strategic preparation to face whatever 2024 has in store.

You can read the second part of this series, focusing on the global competition for natural resources and artificial intelligence, here.

Our colleagues at Reuters are covering these and other crucial stories every day, and you can keep up with the best international reporting from around the world at .

The extent of these sanctions has reached a pointĚýwhere there is now little scope for new measures. The focus now has shifted to tightening the implementation of those measures that are in place.

This means tougher regulation and enforcement, both to prevent deliberate evasion and to punish inadvertent breaches due to inadequate compliance. Businesses that have not already done so would be well-advised to review their procedures to ensure that they are not found on the wrong side of the law.

Tougher regulations

The Russia sanctions are being coordinated at the level of the G7 states (the U.S., Canada, the U.K., Germany, France, Italy, and Japan) as well as the E.U., which are cooperating to track down and freeze the assets of Russian and of the Russian state until Russia pays for the damage it has caused to Ukraine.

G7 states are also coordinating bilaterally, for example, through the designations by theĚýU.S. and the U.K. of professional enablers suspected of helping Russian oligarchs hide their assets.

Reporting obligations have been broadened. In the U.K., relevant firms — not only banks, but others such as auditors, estate agents, and metal exchanges — must inform the Office of Financial Sanctions Implementation (OFSI) if a customer is a known or suspected designated person and provide any information they have about the designated person and any funds or economic resources held on behalf of the customer.

The E.U. has similar measures, but these apply to all persons and now require reports on assets that have not been properly frozen and on the assets of designated persons subject to any move or change in the two weeks preceding their designation.

Tougher enforcement

E.U. and U.K. penalties historically have been significantly lower than those in the U.S., and to date, in 2023, the United States has imposedĚý10 fines totalingĚýmore than $557 million.

By contrast, the U.K. total for 2022 was ÂŁ45,000 and there had been none in 2023 until August, when aĚý. There are, however, clear indications of a tougher approach being developed.

In the U.K., OFSI doubled its staff in 2022, and a breach of financial sanctions is now a strict liability offense, meaning that a person may be fined even if they did not know or have reasonable cause to suspect that they were in breach of sanctions.

OFSI may publicly name and shame organizations that have breached sanctions, potentially inflicting serious reputational damage.

The E.U. has appointed a special envoy to stop sanctions evasion and has issued Ěýexpected to be taken by firms to prevent circumvention. Sanctions violations now constitute an E.U. crime, alongside terrorism, money laundering, and corruption. The E.U. also is working on aĚýĚýto stiffen penalties for sanctions violations to include up to five years in prison and, for companies, exclusion from access to public funding, disqualification from business, placement under judicial supervision, judicial winding-up, or a fine of up to 5% of total group worldwide turnover.

This tougher stance is also reflected in aĚýstricter approach at the E.U. member state level. In 2022, for example, Germany adopted two Sanctions Enforcement Acts and established a Central Office for Sanctions Enforcement. At least 150 cases were reportedly under investigation there, and it is likely that this number has since increased significantly.

Tougher compliance

With governments gearing up, businesses need to ensure that their compliance mechanisms are fully effective and proportionate to their level of risk. Key steps include:

• • • rigorous screening for on-boarding and continuing relationships with business partners, checking not only the counterparties but also their major shareholders, directors, and senior managers to determine whether the counterparty is owned or controlled by a designated person;
    • identifying which jurisdictions apply to their transactions and whether U.S. jurisdiction applies — this includes not only transactions in U.S. dollars, but also those routed through U.S. servers or involving direction, facilitation, or back-office support by U.S. persons;
    • checking on the use of third-party intermediaries and trans-shipmentĚýpoints for Russia and Belarus (for example, China, Armenia, Turkey, and Uzbekistan) for possible sanctions evasion;
    • if conducting business under a sanctions license or exception, ensuring that the conditions (such as reporting and recordkeeping) are met;
    • keeping up to date on sanctions developments because the sanctions measures against Russia have evolved very rapidly, with new measures announced and in force the same day, sometimes without notice;
    • fulfilling all reporting obligations;
    • determining whether other financial or trade sanctions may apply to a proposed transaction, such as granting new loans, dealing in securities, making new investments, and exporting or importing sanctioned goods and services;
    • ensuring that staff have up-to-date guidance and training, and that robust internal reporting and audit procedures are in place; and
    • checking that contracts can be suspended or terminated without liability or serious risk of judicial challenge if sanctions prevent their performance.

Having effective compliance policies not only helps prevent violations but also, if one should occur,Ěýhelps offset the risk and size of a penalty, as well as the related reputational damage. In the coming months, there is likely to emerge a growing list of businesses that failed to heed the warnings and suffered severe consequences.

The contents of this article do not constitute legal advice and are provided for general information purposes only.

The remarks, made recently at , are far from surprising, given the flood of targeted sanctions imposed by governments worldwide since Russia’s February 2022 invasion. And the fact that Russian oligarchs have sought to shield their assets and evade sanctions by assigning family members, associates, and others as nominee owners only has added to the work banks must do.

During early examinations, regulators found that banks were struggling to comply with “regional-focused sanctions” imposed by the United States Treasury’s Office of Foreign Assets Control (OFAC), said Lisa Arquette, associate director, anti-money laundering (AML) and cyber fraud branch with the Federal Deposit Insurance Corporation, and speaker at the ACAMS conference. “Those became a little bit more difficult for institutions to implement at the beginning,” Arquette noted. “But I think they’ve worked through that, and OFAC as a partner to financial institutions has done a lot of outreach.”

Arquette explained that it was vital that when there is a change in beneficial ownership of a legal entity customer, banks should “make sure you have a process to identify that person or those people so that they can also be scanned” against sanctions lists. “There are lots of moving parts related to a lot of commercial entities and legal entitiesĚý— intentionallyĚý— and it’s difficult to know who to add to the scanning process to make sure that you’re not processing transactions that should be blocked or rejected.” she said.

“Malicious actors, threat actors, intentionally may change that information, which is why your diligence is so critically important.”

Stretching ‘finite resources’

As the deluge of Russia sanctions came in wave after wave, banks with “finite resources” needed to devote “an incredible amount of time and energy [to] sanctions compliance,” said speaker Koko Ives, manager,ĚýĚýAML compliance section in the Division of Supervision and Regulation at the Federal Reserve Board. “The pace, the number, the complexity, of Russia sanctions was really unprecedented,” Ives said.

“The global response with E.U., U.S. and U.K. coordination but not identical sanctions, made it particularly difficult for globally operated institutions to navigate all those sanctions, and that was done well,” Ives said. “I guess their existing sanctions programs were pretty strong because that was surprisingly well done in an incredibly time-intensive and difficult [environment].”

The Fed is examining “with the same frequency as before” and “nothing has changed with our examination process,” she added. “Any sort of [bank compliance] issues are garden variety… related to not being able to update software for [sanctions lists] timely enough so there might be something that slips through, or misunderstanding of [OFAC] general licenses, that kind of thing that causes compliance issues.”

Most banks have done ‘really good job’

Another speaker, Donna Murphy, deputy comptroller for compliance risk with the Office of the Comptroller of the Currency (OCC), said she “would echo” what Arquette and Ives said and added that “institutions spent a tremendous amount of resources dealing with those very fast-moving and complex sanctions programs, and in general did a really good job.

“Where we’ve seen issues is where the sanctions programs were not dynamic enough and sometimes maybe didn’t have the capability — at least initially, and it had to be built — to deal with targeted, regional sanctions as opposed to country sanctions, or the complex and evolving structures of some of the sanctioned entities,” Murphy said.

Changes in beneficial ownership or control of legal entities “are very difficult to keep up with as sanctions are evolving and the entities are evolving,” she explained. “It is challenging and needs a lot of focus. I think in general the institutions have done a very good job of implementing these really critical programs for our national security.”

Murphy said the OCC has “spent a lot of time focusing on providing as many resources as possible to our examiners.”

She noted that sanctions have not always been a major focus of OCC supervision, but “we’ve really tried to make sure that our examiners understand these evolving and changing sanctions, and [that] we can provide the support for the exams and the institutions.”

Ives added that some Fed supervised institutions have taken “a forward-looking view of the next geopolitical target.

“Some of the institutions are already developing potential strategies if there are going to be new sanctions in a new part of the world, how might that affect the supply chain, assets that could get hung-up, parties you can no longer transact with, and how that may impact their operations,” Ives noted.

Using interagency regulatory guidance

On the topic of third-party risk management, both Arquette and Ives noted that updated interagency regulatory guidance is imminent and could be released any day. Use of third parties by financial institutions is increasing, Ives added. “It can be incredibly beneficial, especially in the fintech area where [banks] may need the expertise,” she said. “But how is [suspicious activity report] information going to be shared? Do you have what you need to be on the right side of sanctions compliance?”

The intent of the updated interagency guidance is to make consistent federal banking agency guidance on third-party risk management “to make it manageable and holistic” for financial institutions, Ives said.

For many, these sanctions have meant that they have had to expend considerable resources to know their customers better to keep doing business with unsanctioned parties in Russia. Some financial institutions have opted to “de-risk” and avoid the country entirely, exiting account relationships and disentangling themselves from funds transfers tied to Russia.

Ěýavailable on theĚýĚýchannel,Ěýwe speak to the Rachel Wolcott and Brett Wolf of ¶¶ŇőłÉÄę Regulatory Intelligence and the co-authors of a new white paper, The fog of sanctions: Global banks & businesses face unprecedented challenges in applying measures against Russia.

In the podcast, we examine the evolving sanctions environment in several countries, including the United States, the United Kingdom, and the European Union. In addition, the authors also look at the bumpy road to cooperation among allies as they attempt to apply the sanctions that would arguably have the greatest impact.

You can , featuring a discussion about the “Fog of Sanctions” white paper, here.

The authors describe how today’s sanctions environment imposed on Russia is one of the most complex economic punishments ever meted out by the United States, EU, UK, and other nations. And while the U.S. Treasury has been pushing out reams of guidance, other governments have offered little clarity, leaving an information vacuum and major compliance challenges. Not surprisingly, legal, regulatory, and reputational risks faced by banks and businesses have skyrocketed, they explain.

In the podcast, Wolf and Wolcott examine the ways in which many countries are addressing gaps in their anti-money laundering and countering the financing of terrorism (AML/CFT) efforts exposed by the sanctions. The invasion and resulting sanctions have raised scrutiny of private fund managers such as hedge and private equity funds too. With some Russian oligarchs known to be prominent investors in such funds (and some oligarchs subject to sanctions for their ties to Russian President Vladimir Putin), the need to know who is investing in a fund and what it means for compliance are challenges that virtually all private funds face, they add.

The podcast delves into other complex challenges with which governments and global banks are dealing because of the Russian sanctions. These challenges — beyond the application and execution of the sanctions themselves — include everything from the rise of so-called reputation launderers who are working with Russian oligarchs to help them evade the sanctions or obscure their assets, and the problem of asset flight as more global players (both Russian and not) move their assets out of the oversight of regulatory agencies or sanction officers.

Finally, the podcast notes another significant complication stemming from this situation: Many financial services firms within the international finance and trade sectors are finding it difficult to hire financial crime compliance professionals to help meet added demands. In fact, the state firms’ financial crime compliance teams remain in worrisome condition as compliance teams find themselves lacking the resources and the talent to address fully the burdens that the new sanctions regime.

Indeed, those compliance professionals who find themselves short of desperately needed funding may have to make their case to their boards to provide additional resources to beef up compliance teams, the authors argue.

You can access a full copy of the white paper,ĚýThe fog of sanctions: Global banks & businesses face unprecedented challenges in applying measures against Russia, here.

Reflecting these concerns, the latest research from incorporates new findings that highlight some of the impacts that buyers of legal services have experienced. During interviews with general counsel and legal decision-makers of global companies, survey respondents were asked: “How has the escalation of events between Ukraine and Russia impacted your business?” Despite the belligerents of the conflict itself being localized to eastern Europe, the consequences of the war have had a considerable global reach, according to respondents. Many companies that conduct some sort of international business have experienced some impact, with one assistant general counsel stating:

“It has greatly [impacted us]. Just being a global company, anything like this will affect us on some scale.”

The specific nature of the impact occurred in many ways, highlighting the complexity of the issues involved. Numerous companies experienced significant shifts in relation to supply chains, prices, and increased volatility in the global economy. As one chief legal officer put it:

“We had to change supply chains for some of the raw materials we used to get in Russia; and obviously with everything happening, the cost to serve our customers has increased. We’ve seen increases in fuel, which means also increases in our business expenses. So, everything that we thought we had budgeted for when we came into the year, we are almost out of budget. We have to find new ways to cover the gaps. So, it’s made our economy tougher.”

With so many key factors involved, the conflict has also increased the complexity for legal clients in managing different needs within their business. As another chief legal officer noted:

“There is a whole range of limitations, more checks need to be done, we can trade with less countries than before, so the business is being impacted from the point of view of things being simple, from the fluidity of the process, everything has become entrenched and more bureaucratic. We take care in more detail to every single aspect of the sale, we do more checks, more verifications, more analysis.”

Looking at some quantitative data, the research can give an overall picture of the impact of the conflict. It found that 66% of clients are experiencing a direct impact from the Russian invasion. This is regardless of whether they had international needs, demonstrating the reach of the conflict into many different areas of the legal industry as a whole.

Even those buyers with a limited international scope are experiencing consequences related to conflict due to the multi-faceted ways the conflict has impacted the global economy and different business needs. Buyers with more local needs are still subject to the pressures of inflation, potential regulations, and increasing complexity. Law firms should keep this in mind as they evaluate strategic plans because there is a good chance that their clients will have some concerns related to the impact, whether directly or indirectly.

Read the new white paper on how companies and financial institutions are managing Russia sanctions, published by .

The research also looked at the specific nature of the business impact to identify some of the main factors concerning specific issues that clients faced. The research found three core themes: i) economic volatility and inflation concerns; ii) considerations about supply chains and logistics disruption; and iii) the suspension of business for those companies who directly operated in the affected region. These three themes stayed consistent across the two major categories of respondents — those with international needs and those without international needs; however, both groups cited different degrees of impact for each of these factors.

Among those with no international needs, inflation and economic volatility were highlighted as the biggest impact with almost one-third (32%) of respondents citing this theme.

The second major issue cited by both groups — concerns related to supply chains and logistics — was seen as impactful by the many businesses that have extensive operations involving materials and logistical routes impacted by the affected regions. This has led to increased disruption in these areas which have forced business to have to adapt in managing their current supply chains. “We are a pretty sensitive business to escalation, as you can imagine it is construction,” said one chief legal officer. “Anything that impacts oil, to materials, to a lot of different things, have impacted cost and delivery time.”

The third major issue cited was the suspension of business in countries, mostly those directly impacted by the conflict. This theme was cited the most among businesses with international needs and highlights some of the more direct impacts we have seen as a result of the invasion. Speaking about operations in Russia and Ukraine, one chief counsel reported, that the impact was considerable:

“Because we have stopped doing transactions in Ukraine and Russia. We don’t have the stores open; we have them all closed. 500 stores closed in Russia and 130 stores closed in Ukraine. 10,000 workers in Russia and 1,400 in Ukraine.”

Interestingly, the impact on clients’ own legal operations was not as keenly felt, according to respondents. For example, the survey found that 80% of corporate law departments say they have been impacted by conflict, but they did not see any substantive impact in how they use legal service providers. For those that did cite change, this was mostly around seeking additional assistance with the navigation of new policies, as one chief legal officer notes: “We have more reliance on law firms to ensure that we remain compliant in our business dealings.”

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The sanctions have meant that many of these banks and businesses have had to expend considerable resources on getting to know their customers better so they can keep doing business with unsanctioned parties in Russia; while other financial institutions have opted to “de-risk” and avoid the country entirely, exiting account relationships and disentangling themselves from funds transfers tied to Russia.

In a new white paper, , the TRRI team examines the evolving sanctions environment in several countries, including the United States, the United Kingdom, and members of the European Union. In addition to examining what each country is doing by itself and in concert with others, this paper also looks at the troubling lack of clarity and cooperation among allies in properly applying sanctions against Russia on a global basis that would arguably have the most impact. (Besides Russia, Belarus and Russian-occupied areas of Ukraine also have been targeted for sanctions.)

You can access a full copy of the white paper, , here.

Indeed, Western sanctions against Russia following its invasion of Ukraine are some of the most complex economic punishments ever meted out by the United States, EU, UK and other nations. While the US Treasury Department has been pushing out reams of guidance, other governments have offered little clarity, leaving an information vacuum and major compliance challenges. As the paper explains, varying expectations among nations and a widespread dearth of guidance are making compliance with the unprecedented complexity of Russia sanctions difficult and costly. Not surprisingly, legal, regulatory, and reputational risks faced by banks and businesses have skyrocketed.

Meanwhile, US bank regulators have publicly stated that their examiners will be looking into compliance with sanctions, with the US Treasury Department continuing to offer guidance aimed at helping financial institutions avoid compliance pitfalls. Further, the EU and UK have issued broad sanctions and prohibitions on corporate services, while drawing criticisms that they have failed to provide clarity regarding regulatory expectations.

The paper also looks at the ways in which many countries are addressing gaps in their anti-money laundering and countering the financing of terrorism efforts that have been exposed by the sanctions. The invasion and resulting sanctions have as well raised scrutiny of private fund managers such as hedge and private equity funds.

Varying expectations among nations and a widespread dearth of guidance are making compliance with the unprecedented complexity of Russia sanctions difficult and costly.

With some Russian oligarchs known to be prominent investors in such funds — and some oligarchs subject to sanctions for their ties to Russian President Vladimir Putin — the need to know who is investing in a fund and what it means for compliance are challenges that virtually all private funds face.

Other complex and steep challenges with which governments and global banks are dealing because of the Russian sanctions are also detailed in the paper. These challenges — beyond the application and execution of the sanctions themselves — include everything from the rise of so-called reputation launderers that are working with Russian oligarchs to help them evade the sanctions or obscure their assets, and the problem of asset flight as more global players (both Russian and not) move their assets out of the oversight of regulatory agencies or sanction officers.

Another significant complication is that many financial services firms within the international finance and trade sectors are finding it difficult to hire financial crime compliance professionals to help meet added demands. In fact, the state of financial services firms’ compliance teams remains in worrisome condition as compliance teams find themselves lacking the resources and the talent to fully address the burdens that the new sanctions regime has place upon them.

Indeed, compliance professionals who find themselves short of desperately needed funding may wish to share this reality, and this paper, with their boards as they push for additional resources.

These multilateral sanctions campaign took less than a month to develop and has been more complex and profound than similar campaigns that have been implemented against countries such as Syria, Iran, North Korea, or Venezuela. These restrictions seem to have been put in place in a well-coordinated manner, particularly in regard to the vast number of export restrictions on technology goods and services, as .

As the war continues, almost every week a tightening of the international sanctions regime is announced as new measures and restrictions are introduced. The International Working Group on Russian Sanctions, for example, has and provided guidance and research on how to improve their effectiveness and deterrence. It is not a surprise then — in a move that confirms the US government’s understanding of the effectiveness of the current measures — that on April 20, it included in its sanctions campaign penalties against facilitators of those seeking to evade sanctions. With these new sanctions, the those financial and operational support networks that have been put in place with the purpose of circumventing any primary blocking mechanism by Western countries. Just two weeks later, the EU Commission said it too would to target facilitator networks.

While these new sanctions against facilitators are still defined as a primary blocking mechanism, they nevertheless have a much more dynamic deterrence component: it is expected that the US Treasury will expand the number of entities whenever it is made aware of or has information that such facilitator networks exist.

Indeed, there are literally thousands of companies that have been formed with the purpose to circumvent sanctions and restrictive measures. For example, more than 10 years ago, ¶¶ŇőłÉÄę conducted a research study on the sanctions program against Syrian war criminals and found that 24 Syrian sanctioned entities were connected to more than 1,000 entities across five jurisdictions, with a vast number of those entities being located in Cyprus.

The use of shell companies (due to their ease of formation) in certain jurisdictions and tax havens around the world is by far the most common technique and method of sanctions evasion, and one reason why the US has moved to target facilitator networks.

The Russian sanctions campaign is much larger in scope than anything that has been put in place before; hence, the potential for facilitator networks to be active is very large. In addition, because the Treasury’s Office of Foreign Assets Control (OFAC) considers entities blocked that are owned individually or in aggregate by a blocked person (50% rule), beneficial ownership information, particularly when gathered from jurisdictions outside of the US, can play a critical role.

As a result of the current sanctions environment and the elevated importance of efforts to combat corruption and money laundering since the beginning of 2021, market participants (companies and financial institutions) are in a reactive mode. They need to take ample measures to comply with new mandates and need to ensure that their compliance frameworks are robust enough to meet future regulations that are certain to come. This includes the discovery and reporting of sanctions evasion activities to corresponding financial intelligence units and law enforcement.

Market participants have a couple of possibilities for adapting their compliance and risk management programs to this new reality.

Implementing a data-driven compliance program

Three components can be used to minimize facilitator network sanctions evasions and thus ensure compliance. The first is the availability of continuously updated sanctions and blocked entity lists; the second is the enhancement of such lists with an adverse media capability; and the third is the additional use of global beneficial ownership information.

One of the challenges for compliance executives has been that the above-mentioned sources tend to be used in isolation — for example, using various heterogeneous data sources that are not connected to each other. The use of these three components separately may provide some insight, but since names need to be run individually, often through a manual process, such use is time- and resource-consuming as well as ineffective. For larger organizations that need to screen thousands of customers, it can be difficult to obtain a singular view on any one entity.

In contrast, being able to use these three data components in combination allows for the generation of unparalleled insight; and, at the same time, provides significant time-savings on the actual conducting of due diligence, which is often a cumbersome and time-consuming process. The combination of these data sources will also ensure that information previously hidden is uncovered and can be assessed through either sanctions or adverse media information.

For example, when Russian oligarch Alisher Usmanov was sanctioned by US and European authorities, it was difficult to freeze his vast fortune because his business conglomerate is held by dozens of offshore entities, . Usmanov alone owns a 49% stake in his main steel company, Metalloinvest. His yacht Dilbar, for example, is owned by Navis Marine Ltd. in the Cayman Islands, which in turn is owned by the Cyprus-based firm Almenor Holdings Ltd, which again in turn is owned by Swiss-based Pomerol Capital.

Screening these names only against a sanctions list would not reveal any significant findings. But when combined with additional sources such as an adverse media capability or a beneficial ownership registry, Usmanov’s evasion network would be uncovered much easier. In this case, research and investigative media organizations provide this insight. (The owner of the yacht Dilbar was ultimately discovered to be Usmanov’s sister, Gulbakhor Ismailova. The yacht was in April of this year, from the moment this information became public knowledge.)

Sanctions that target facilitator networks therefore rely to a large extent on external market participants and investigators, who have the resources to conduct due diligence and who are able to share this information with lawmakers. Also, market participants can play their part to increase the effectiveness of sanctions against facilitators by submitting designated Suspicious Activity Reports (SARs) to authorities.

It will be to everyone’s benefit when this information is shared and acted upon, making the current sanctions campaign against facilitator networks more effective.

In the first half of 2021, the Financial Crimes Enforcement Network (FinCEN) received ransomware-related suspicious activity reports than in the entire previous year. In late January 2022, the US Department of Homeland Security could soon target critical US infrastructure, such as utility providers and banks. The White House countercorruption strategy notes that the US government will continue assessing how digital assets and cybercrime are supporting corrupt actors, and how corrupt regimes are using ransomware and other illicit cyber activities to further their foreign policy goals.

The efforts to counter the threat will almost certainly include additional designations against digital wallets linked to malign actors and increased cooperation between law enforcement and private-sector entities to identify, track, and recover ransom payments and take down malign actors.

Ransomware operations are , and Russian intelligence agencies turn a blind eye to, protect, and sometimes support these criminals, as long as they do not target Russian assets and occasionally perform tasks for the government. Possible government tasks include targeting adversaries’ financial institutions and critical infrastructure as a form of hybrid warfare.

FinCEN and other government agencies will play a key role in the battle against ransomware and state-linked cyber actors by issuing advisories and working with law enforcement to recover funds. The US government also will almost certainly focus on mixing services, virtual currency exchanges, and other operations that help malign actors conceal transfers of cybercrime proceeds. The US Treasury has an array of cyber-focused and an expansive targeting Russia’s malign activities at its disposal to mitigate the risk of malicious cyber-attacks linked to stateĚý actors.

Staying ahead of the curve

US firms must be forward leaning in their efforts to examine their compliance programs and reassess their risk appetites regarding corruption, particularly with many new sanction designations related to Russia’s invasion of Ukraine, and especially against Russian elites, government officials, and oligarchs. Strategic corruption red flags include jurisdictional risks, lack of transparency, involvement of politically exposed persons (PEPs) in financial transactions, and other indicators.

Russia and China are known for weaponizing corruption to achieve their geopolitical goals, but other countries, such as and Azerbaijan, also use this strategy. Turkey’s state-owned Halkbank is accused of helping Iran evade US sanctions, and several attorneys with links to the US government were involved in efforts to free a Turkish businessman connected to the sanctions-evasion conspiracy. Azerbaijan and other post-Soviet states like Kazakhstan have co-opted elites, creating kleptocratic networks to further their foreign and domestic policy goals.

Jurisdictions by FinCEN under Patriot Act Section 311, such as Iran and North Korea, or greylisted for in anti-money laundering and countering the financing of terrorism (AML/CTF) by the intergovernmental Financial Action Task Force (FATF) also tend to weaponize corruption as a tool further their geostrategic goals.

On December 7, 2021, FinCEN issued a proposed , soliciting comments from those stakeholders who would be required to file Beneficial Ownership Information (BOI) reports. US firms and financial institutions should be particularly cautious about transacting or working with entities whose ownership and control is hidden behind a web of shell or front companies, as well as those located in jurisdictions with lax transparency requirements that do not require the identification of ultimate beneficial owners.

Although the involvement of a PEP in a business transaction or a company structure does not, in and of itself, indicate the presence of strategic corruption, PEP status warrants additional scrutiny. Enhanced due diligence is particularly important when the PEP is working in vulnerable industries, such as real estate, energy, defense, or IT, or in risky jurisdictions, or has an unexplained amount of wealth.

Companies engaged in these sectors should reassess their risk programs, possibly perform transaction monitoring, track changes in employment for clients — especially those in risky jurisdictions or who raise other red flags. Companies also should keep abreast of possible upcoming regulatory changes mandated by the Corporate Transparency Act, given the Biden administration’s commitment to treating corruption as a national security concern.