8 December 2021 by , and Corporate Investigations Alert

Rather safe than sanctioned: Mitigating your organisational risk of transacting with sanctioned entities and individuals

In October 2021, the US Department of Treasury released a report detailing the global trends and challenges identified by the US in enforcing sanctions (US report). The identified challenges are not unique to the US and are likely to be experienced in jurisdictions in which a comprehensive sanctions framework is implemented.

As some of the challenges raised in the report may affect how your business negotiates its corporate and commercial agreements, in this article we unpack the South African sanctions regime and advance measures to mitigate your organisational risk in transacting with sanctioned entities or individuals. 

South Africa’s sanctions regime

South Africa has ratified several international conventions and treaties and participates in forums that require the country to implement measures to prevent and combat corrupt activities. These conventions include the United Nations Convention Against Corruption (2003), the Organisation for Economic Cooperation and Development’s Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (1997), the African Union’s Convention on Preventing and Combating Corruption (2003), the Southern African Development Community’s Protocol against Corruption (2001), and the United Nations Convention against Transnational Organised Crime (2000) and its associated protocols.

Sanctions impose restrictions on activities that relate to a particular country’s goods and services, or persons and entities. The targeted financial sanction measures which apply in South Africa generally restrict sanctioned persons and entities from having access to funds and property under their control and from receiving financial services in relation to such funds and property. The term “targeted financial sanctions” refers to both asset freezing and further prohibitions in the form of sanctions.

South Africa’s targeted financial sanctions regime is regulated through the country’s anti-money laundering and counter terrorism financing legislative framework comprising of, amongst others, the Financial Intelligence Centre Act 38 of 2001 (FICA).

The Targeted Financial Sanctions List (TFS List) contemplated in section 26A(1) of FICA refers to natural persons or entities identified by the United Nations, that are involved in terrorist acts and/or are connected to the proliferation of weapons of mass destruction. This provision aims to enforce the South African legal requirement for the implementation of TFS and applicable TFS regimes under Chapter VII, Article 41 of the United Nations Charter.

Read with FICA, the TFS List, which is published by the Financial Intelligence Centre and is publicly available, requires accountable institutions listed in FICA to determine whether they have a sanctioned person or entity as a client or whether a prospective client is a sanctioned person or entity so as to determine their exposure to money laundering and terrorist financing risks.

Selected global sanction regimes

The US report acknowledges that sanctions should be directed at certain objectives such as countering forces that fuel regional conflict, curtailing nuclear proliferation activities and ceasing specific instances of national atrocities.

The United Nations Security Council can take action to maintain or restore international peace and security. This action may take the form of resolutions by the United Nationals Security Council to impose sanctions against countries, companies or persons.

Companies and persons sanctioned by the US appear on the US Treasury’s Office of Foreign Assets Control (OFAC) List of Specially Designated Nationals and Blocked Persons (SDN List).

Trade and other business activities with persons or in jurisdictions appearing on the SDN List is a criminal offence in the US and the penalties are enforced against those who the American Code of Federal Regulations defines as “US persons” while secondary sanctions are enforced extraterritorially against “non-US persons”.

Secondary sanctions may be imposed by the US on non-US persons that trade or engage in other activities with persons/entities appearing on the SDN List, even though there may be no nexus between the transaction and the US.

The purpose and aim of these types of sanctions is to deter non-US persons from engaging in certain dealings, deemed to be contrary to US national security and foreign policy interests, by restricting their access to US markets.

Thus, entities incorporated in African countries would have exposure to secondary sanctions enforced by the OFAC in relation to any transactions with those appearing on the SDN List. Secondary sanctions appear to include various levels of exclusion from the US financial system, including (but not limited to) an entity being placed on the SDN List as a consequence of transacting with entities or individuals appearing on the SDN List.

Challenges facing the enforcement of sanctions

The US report states that some of the challenges in enforcing sanctions include the prevalence of cybercriminals and growing pressures on the workforce and policymaker demands. The US report further acknowledges that the OFAC should aim to mitigate unintended consequences of sanctions on domestic workers, businesses, allies and non-targeted populations.

A further need to publicly communicate messages related to sanctions and engage with key stakeholders has been highlighted in the US report as critical in the enforcement of secondary sanctions.

Analysis

Failure to comply with targeted financial sanction obligations is an offence under FICA. The fact that an accountable institution relies on commercially available screening capabilities or considers the risk of being exposed to obligations relating to targeted financial sanctions to be low, is not a defence against conducting business with a person or entity that appears on the TFS List.

Non-compliance with the provisions of FICA may attract penalties including, amongst others, a reprimand, a restriction or suspension of certain specified business activities or financial penalties for a business up to an amount of R50 million.

The necessity to undertake due diligences on counterparties becomes prevalent before entering into a corporate or commercial agreement, specifically where there is uncertainty if the counterparty has been sanctioned or where counterparty’s exposure to targeted financial sanctions appears to be low. When considering the increasing ways in which persons and entities are circumventing the enforcement of sanctions, as noted in the US report.

When drafting the contractual terms, the counterparty should warrant that they are not a sanctioned entity, and the agreement should provide cancellation provisions to allow for the innocent party to terminate a contract without incurring damages if the counterparty is or becomes sanctioned during the business relationship.

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