Economic sanctions at the national and international level and their impact on charities

Article 12 October 2022 Experience: Sanctions
Charities and non-profit

Economic sanctions and their impact on charities

The recent and dramatic events in Ukraine have seen part of the international community make increased use of economic sanctions in an effort to curb Russia’s military actions. The UK, the EU, the US and various other countries, including Australia, Canada, Japan, New Zealand, Singapore and Switzerland, have adopted packages of financial sanctions targeting Russian and Belarusian entities and individuals as well as sectoral sanctions that affect a broad range of trade and investment activities.¹

This rapid expansion of the global sanctions framework has prompted commercial and other operators across a wide range of sectors to update their internal compliance procedures to minimise the risk of inadvertent breaches of sanctions law.

Although their activities may be relatively low risk and are often perceived accordingly in such a context, charities and non-profit organisations can also be affected by sanctions laws. When they are approached by a potential donor, select a grantee or look to pay funds (whether domestically or internationally), charities should conduct due diligence and be aware of potential restrictions deriving from sanctions laws².

The Ukraine-related sanctions may affect charities whose activities have a connection, for example, with Russia, Belarus or the occupied regions of Ukraine (Crimea, Sevastopol, Donetsk and Luhansk). Depending on the geographical scope of their activities, charities may be affected by other international sanctions regimes.

Economic sanctions between international, EU and domestic regulation

Economic sanctions are restrictive measures that can be put in place at the international, EU or national level to fulfil a range of purposes, including maintaining international peace and security, preventing terrorism or threats to national security or bringing about a change in policy by another State³.

At the international level, sanctions can be imposed by the UN Security Council under Chapter VII (Article 41) of the United Nations Charter. UN sanctions have ranged from comprehensive economic and trade sanctions to more targeted measures such as arms embargoes, travel bans, and financial or commodity restrictions⁴. There are currently 14 active UN sanctions regimes⁵. The UN regimes are implemented by UN Member States under the guidance and supervision of the UN institutional framework⁶.

At the EU level, sanctions can be imposed by the EU Council as part of the EU Common and Foreign Security Policy⁷. The EU has over forty different sanctions regimes in place (including UN-backed regimes)⁸. They include arms embargoes, restrictions on admission / travel bans, asset freezes and other economic measures such as restrictions on imports and exports⁹. Sanctions instruments adopted by the EU are implemented and/or enforced within the 27 EU Member States.

A number of sanctions regimes have been adopted unilaterally at the national level. For example, on the eve of Brexit, the UK put in place domestic sanctions regimes under the Sanctions and Anti-Money Laundering Act 2018 and statutory instruments. Some of these regimes are backed by UN Security Council resolutions (e.g. the UK Libya sanctions¹⁰), others are not (e.g. the UK Ukraine-related sanctions in respect of Russia and Belarus¹¹). The UK sanctions regimes include 9 “thematic” regimes (e.g. sanctions relating to chemical weapons) and 29 “geographic” regimes.¹²

The US has launched numerous sanctions programmes over the years. The Office of Foreign Assets Control (“OFAC”) of the US Department of the Treasury currently administers around 38 sanctions programmes (both UN- and non-UN-backed).¹³

Economic sanctions frequently target activities and situations that occur outside the borders of the implementing jurisdiction. They may impose obligations on individuals and entities located within the implementing jurisdiction, but also on nationals of the implementing jurisdiction at large, wherever they are located. Economic sanctions regimes thus have “a clear extraterritorial element”.¹⁴

In sum, the global sanctions landscape is a patchwork of international, EU and domestic sanctions regimes with potential extraterritorial effects. This is a source of normative complexity and may (indeed, frequently does) give rise to overlapping regimes. For example, a UK entity with US directors and operations in the EU may have to comply with the sanctions regimes of all three jurisdictions (which, at least when they are not underpinned by UN Security Council resolutions, may also differ significantly). Navigating the global sanctions landscape frequently requires international law analysis and multi-jurisdictional legal advice.

Amongst the various categories of economic sanctions, financial sanctions (as opposed to trade and other sectoral sanctions) can be particularly relevant to charities. Already in November 2020, the UK Charity Commission had warned that “from donors and beneficiaries to partners and contractors, charities may come across individuals, organisations or countries which are subject to financial sanctions in the delivery of their charitable activities”. ¹⁵

Without purporting to be specific or comprehensive in any way, we set out below some high-level examples of how the work of charities may be affected by financial sanctions.

Financial sanctions and donations inbound

Charities have duties of due diligence in relation to their donors, beneficiaries and partners.¹⁶ The type of due diligence procedures to be put in place depends on the nature and level of risk involved. The scope of charities’ “know your donor” obligations can include procedures to detect money laundering or disposal of the proceeds of crime.¹⁷ In appropriate circumstances, it can encompass financial sanctions due diligence.

Asset freezes (or “blocking sanctions” as they are called in the US) are common financial restrictions under numerous sanctions regimes. An asset freeze is normally imposed in respect of a designated or listed person or entity. It generally attaches to every asset owned or controlled, directly or indirectly, by that person or entity. It typically extends downstream to assets held by companies that are owned or controlled by an asset freeze target, directly or indirectly. An asset freeze normally entails related prohibitions against making funds available to, or for the benefit of, the asset freeze target. Breaches of these prohibitions (as well as of financial sanctions requirements more generally) can carry criminal and civil penalties.

Where, in the circumstances, such a risk may reasonably exist, charities are advised to ensure that their potential donors are not asset freeze targets within the jurisdictions to which the charities’ activities are subject.

This is so because, even if the primary objective of an asset freeze is arguably to prevent the asset freeze target from obtaining funds, accepting donations from an asset freeze target can still entail legal risk: it may be prohibited under the applicable sanctions regime outright, or it may otherwise expose the charity to a charge or suspicion that it is dealing with frozen assets or is assisting the asset freeze target in concealing the same. ¹⁸ There are also broader reputational reasons why a charity may wish to avoid dealing with a sanctioned donor.

Financial sanctions and grants outbound

Depending on the circumstances, making grants can be affected by financial sanctions restrictions, including asset freezes.

As explained above, making funds available to an asset freeze target would usually constitute a breach of sanctions law. Thus, as part of its “know your beneficiary” procedures, a charity may want to ensure that the grantee is not an asset freeze target before making a grant.

This might seem a remote occurrence. However, countries in need of humanitarian help or of initiatives in support of human rights can also host regimes or involve groups that are targeted by sanctions regimes. This should call for enhanced due diligence by charities operating in these countries.

Further, charities should be aware that it is not just providing funds to a designated person that can incur liabilities for breaches of financial sanctions requirements. Liability may attach even if a charity provides funds to an entity that is directly or indirectly controlled by a designated person. Providing funds to an individual (such as a family member) who may hold funds on behalf of a designated person can also attract liability.

Charities should also assess the scope of the reporting obligations which they may have under sanctions laws if they acquire information regarding breaches of sanctions laws or actual or potential asset freeze targets. ¹⁹

It is noteworthy that, frequently, restrictions under sanctions laws are subject to exceptions and licenses (or authorisations). Exceptions are carve-outs from the scope of prohibited activities and operate automatically. Licenses (or authorisations) are issued by the regulator on an ad hoc basis to carry out what would otherwise constitute prohibited activities. Under certain sanctions regimes the regulator can also issue general licenses, which – contrary to specific licenses – apply to a class of individuals or entities. Certain licenses can be relevant to charities, such as, for example, licenses issued for humanitarian activities. ²⁰

Banking and currency restrictions

Charities should further be aware of the financial restrictions that apply to the banking sector as well as currency restrictions under sanctions laws.

Banks and financial institutions that are affiliated with certain regimes or groups or provide funding to the same can themselves be subject to asset freezes. As a general matter, it would seem prudent for charities to keep their funds in reputable and low risk banks. When using the banking system to make payments, charities are advised to ensure that the financial institutions to which, or via which, payments are to be made are not asset freeze targets. This applies even if the actual payee is an unsanctioned person.

There are other forms of financial sanctions that, short of an asset freeze, impose restrictions on financial institutions, such as the prohibitions in relation to correspondent banking relationships and sterling clearing that are set out in the UK Russia (Sanctions) (EU Exit) Regulations 2019. ²¹

Further potentially relevant financial sanctions are currency restrictions. For example, the US sanctions in respect of Russia prohibit the supply, from the US or by a US person, wherever located, of USD-denominated banknotes to the Russian Government or any Russian person.²² Similar restrictions (for EUR and other EU Member States’ currencies) are set out in the EU Russia sanctions instruments²³.

Conclusion

Economic sanctions are part of the current international and domestic legal climate. Their existence is a stark reminder of the existence, around the world, of regimes, groups and situations that pose a threat to human rights, peace, security and international law.

Economic sanctions do not exist to prevent charitable activities. Nor indeed should they deter charities from doing their work. Charities, depending on the scope of their activities, can be more or less insulated from the impact of economic sanctions. However, they should be aware and well advised of their existence, scope and potential relevance. For example, in appropriate circumstances, charities should consider incorporating financial sanctions due diligence into their internal compliance procedures.

¹ See Minami Funakoshi, Hugh Lawson and Kannaki Deka, ‘Tracking sanctions against Russia” (9 March 2022, updated 7 July 2022) Reuters Graphics.
² See, for example, HM Treasury’s Office of Financial Sanctions Implementation (OFSI), ‘Charity sector guidance. Financial Sanctions guidance for charities and other non-governmental organisations’ (1 November 2021) .
³ See UN Security Council, Sanctions”; UK Government, ‘“UK Sanctions”:’ European Commission, Overview of sanctions and related tools’ .
⁴ UN Security Council, ‘“Sanctions
⁵ UN Security Council, ‘Sanctions’. These sanctions regimes are maintained in respect of the following countries, groups or situations: Somalia; the Islamic State in Iraq and the Levant (Da’esh), Al-Qaida and associated individuals, groups, undertakings and entities; Iraq; the Democratic Republic of Congo; Sudan; the 14 February 2005 terrorist bombing in Beirut, Lebanon that killed former Lebanese Prime Minister Rafiq Hariri and 22 others; the Democratic People’s Republic of Korea; Libya; the Taliban, and other individuals, groups, undertakings and entities associated with them; Guinea-Bissau; the Central African Republic; Yemen; and Mali.
⁶ See Jonathan Brewer and Richard Nephew, “Improving Implementation of UN Security Council Sanctions Resolutions” (June 2017) Columbia SIPA – Centre on Global Energy Policy, 6-8, on the respective roles of UN sanctions committee and panels of experts and of the UN Secretariat as well as on national implementation of UN sanctions.
⁷ The ambits of the EU Common Foreign and Security Policy are defined in Article 21 of the Treaty on the European Union.
⁸ European Commission, Overview of sanctions and related tool”.
For an overview of the various EU sanctions regimes, see ‘“EU Sanctions Map”.
⁹ European Commission, ‘Overview of sanctions and related tools.’
¹⁰ The Libya (Sanctions) (EU Exit) Regulations 2020.
¹¹ The Russia (Sanctions) (EU Exit) Regulations 2019; The Republic of Belarus (Sanctions) (EU Exit) Regulations 2019.
¹² UK Government, “‘UK Sanctions Regimes’”.
¹³ US Department of the Treasury, “‘Sanctions Programs and Country Information’”:
¹⁴ Leïla Choukroune and James J Nedumpara, International Economic Law: Text, Cases and Materials (CUP 2022) 756.
¹⁵ Charity Commission, ‘“4 things charities need to know about financial sanctions” (13 November 2020) OFSI Blog .
¹⁶ Charity Commission for England and Wales, ‘“Compliance Toolkit: Protecting Charities from Harm. Chapter 2: Due diligence, monitoring and verifying the end use of charitable funds: summary “ (September 2016).
¹⁷ Charity Commission for England and Wales, ‘“Compliance Toolkit: Protecting Charities from Harm. Chapter 2: Due diligence, monitoring and verifying the end use of charitable funds: summary” (September 2016) , 2.
¹⁸ See, for example, Sanctions and Anti-Money Laundering Act 2018, s 3(1)(e), according to which sanctions regulations adopted under the umbrella of the Act can include prohibitions or requirements for the purpose of inter alia “preventing funds or economic resources from being received from—(i) designated persons […]”.
¹⁹ See, for example, Sanctions and Anti-Money Laundering Act 2018, s 16(1), allowing for sanctions regulations adopted under the umbrella of the Act to inter alia (i) require or authorise persons of a prescribed description to inform an appropriate authority of prescribed matters; or (ii) create and retain registers or records.
²⁰ See, for example (in the UK), The Russia (Sanctions) (EU Exit) Regulations 2019, Sch 5, para 9A; HM Treasury, Office for Financial Sanctions Implementation (OFSI), General License INT/2022/1947936, 7 July 2022.
²¹ The Russia (Sanctions) (EU Exit) Regulations 2019, Regulation 17A.
²² Executive Order 14068 of 11 March 2022, s 1(a).
²³ Council Regulation (EU) No 833/2014 of 31 July 2014, Article 5i.

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