Published:  03:41 AM, 03 August 2021

Battle of Sanctions: Our Woes


Sanction is a penalty in the form of economic and political decisions that is imposed on another country or individuals or entity to protect national security and trade interest. These days it has become a part of foreign policies of different countries besides being used as a weapon to put economic pressure to control international trade and politics.

Broadly two types of sanctions (Trade and Economic) were used by the countries of the world. Trade sanctions are old in its forms and containsTariffs, Quotas, Embargoes and Non-Tariff Barriers (NTBs) Where Economic sanctions are three types. Firstly, Targeted Sanctions- aimed at particularly named individuals such as key leaders in a country, narcotics traffickers and proliferation of weapons of mass destruction.

Penalties under these sanctions are asset freezing and travel ban. Secondly, Sectoral Sanctions -are imposed on very specific subset of an economy to impede the future growth. Such sanctions were recentlyimposed on Russia, including the country's central bank, finance ministry, and sovereign wealth fund by USA, on April 15, 2021.

Thirdly, Comprehensive Sanctions-totally isolate a country from doing import, export, trade brokering, financing or facilitating against most goods, technology and services. Such sanctions were imposed for gross human rights violation and nuclear proliferation which is given on North Korea, Iran and Syria.  Economic sanctions are a way to financially isolate a target. Countries are using these instead of military force because of less expensive than military war.

Basedon issuing parties, Sanctions are categorized as Unilateral and Multilateral sanctions.  A "unilateral" sanction means that a single country is enacting it. While a "multilateral" sanction means that a group or block of countries is supporting its use. The latter is less risky than the former one.  United Nations (UN) and EU are issuing multilateral sanctions w0here USA, UK, Canada and Australia are issuing unilateral sanctions.

UN sanctions are managed by UN Security Council Resolution to support peaceful transition of power, deter non constitutional changes, constraint terrorism, protect human rights and promote non-proliferation.The sanctions imposed are punitive and most dangerous for any country in the world. Under treasury department, Office of Foreign Assets Control (OFAC) issued the sanctions by preparing Specially Designated Nationals (SDN) and Blocked Parties list.

SDN list contains thousands of names individuals and business as well as aircraft and ships (vessels) from more than 150 countries of the world that the USA government considers to be terrorist, international narcotics trafficker or other covered by US foreign policy and trade sanctions. If any individual or entity included in OFACs sanctions, financial institutions are prohibited from providing property or an interest in property. OFAC has power to impose significant monetary penalty on those who are found to be in violation of the blocking order.

This includes freezing or rejection of transactions. OFAC's sanction program are governed by two legal basis. Firstly, Presidential wartime and national emergency power. Secondly, USA PATRIOT Act, Section 311 (Special measure for primary money laundering concern) and Section 319 (a) (Forfeiture from US correspondent account.

Under section 311, assets under US jurisdiction can be freeze and under Section 319(a) US government can seize funds from any correspondent bank account maintained in New York. Regardless of location all US citizens and entities are bound to comply OFAC sanctions as primary sanction.

Other than US people and entities rest of the world are also bound to comply OFACs sanctions due to its extra territorial effect under secondary sanction. Bangladesh falls under secondary sanctions. Moreover a country comes under primary sanctions when she deals with US elements like, US people, entity, USD currency and banking system.

As the US dollar denominates the world all countries of the world are bound to comply either with primary or secondary sanctions. Global dollar transaction and clearing becomes US centric.  Due to this two strategic reasons, decades after decades, USA and its alliesare dominating the world's economy, trade and politics. And till end of 2020 no countries of the world have legal basis to protest western sanctions.

Worlds Maiden Anti-Foreign Sanction Law of China
Finally on June 10, 2021, world's second largest economy, China has enacted, Anti-Foreign Sanctions Law (AFSL) for safeguarding its national sovereignty, dignity and core interest and oppose western hegemonies and power politics.  China previously had neither the economic power nor the political will to use legal means to retaliate against different countries unilateral sanctions. But now it has both. AFSL is a wide ranging legal tool from Beijing to fight back and retaliate against any western sanctions imposed on China or Chinese parties or interests.

Under the law China has right to take two types of counter measures. Frist, China has the right to take countermeasures against foreign countries those interfere in China's internal affairs, take discriminatory, restrictive measures such as containment and suppression against Chinese citizens and organizations according to its own law. Second, China will take necessary countermeasures against some entities and individuals that advocate, incite and fund Taiwan, Xinjiang, Tibet, Hong Kong's independence and have other serious violations that endanger Chinas sovereignty, security and development interests.

Among all the 16 articles of the AFSL, only article 12 provides for the blocking obligation with all the remaining articles focusing on the contents, standards, legal liabilities and other matters of countermeasures and the counter sanction list. Articles 6 of the AFSL are basically same with the relevant sanctions imposed by the department of Treasury and the department of state of the USA. Meanwhile, the provision in Article 5 that the related parties or entities subject to countermeasures may be included in the counter sanction list mirrors the "50% rule" of OFAC's sanction.

What are the countermeasures?
Countermeasures list includes denying visas, deportation, seizing asset and prohibiting or restricting relevant transactions of those, who formulate or comply with sanctions against Chinese business or officials.

Who are the subjects to countermeasures?
(i) Individuals or organizations that have been "directly or indirectly involved in the "formulation, adoption and implementation" (ii) spouses and immediate family members (iii) senior managers or actual controllers of listed organizations and (iv) the organization itself.Under the broader scope a lots of folks like scholars, pundits, think-tank could be sanctioned by AFSL for supporting on sanction on China.
Challenges

*  The law imposes obligations not only on businesses that are located within China but also on those outside of China. Due to this extra-territorial features Bangladesh should also abide by AFSL

*  Under the law, no list of foreign sanctions will be published first for others like OFAC list. It's a pressure for rest of the world for knowing what the sanction basket contains to trigger compliance.

*  Several Bangladeshi banks have physical presence in Hong Kong as subsidiary like AB Bank, City Bank, EBL, EXIM and Prime Bank. These banks have to directly comply with all articles of AFSL with increased scrutiny.

*  Cost of doing business will be increased due to maintaining higher compliance

* To fight against trade based money laundering, bank usually using third party vendor's automated "sanction screening" solutions. In case of Chinese sanction no third party, "sanction screening" solutions are available in the market. So banks have to manually check sanctions before issuing every LC.

* The law gives Chinese citizens or organizations the right to claim damages or seize assets or to sue in Chinese court against any individuals or organizations that fails to comply.

*  Countries are now in dilemma of compliance. If we comply US sanctions, Chinese sanctions will be violated again if Chinese sanctions are complied, US sanctions will be violated. Hence a country can't comply both countries sanction at a time.

*  The law defined Chinese territory including Hong Kong, Macao, Tibet and Taiwan. But in real world each territory is separate and has different rules.

Finally, we can say that AFSL creates a new compliance requirement for the world. Still it is unclear how we will be affected. So every development should be carefully checkout for ensuring our ties with two largest economy. Bangladesh is an importing nations and more than 60% of our total import is China bounded. Whereas our export is USA and EU centric. Most of the raw materials of our major export (RMG) is importing form China under Back to Back LC mechanism. To secure both of our export and import destination, we have to technically handle the situations. Cost of non-compliance is higher than cost of compliance.Our compliance should be rigorous and updated.

Correspondent banking and trade finance professionals should have sufficient updated knowledge before making any external relations (RMA) with foreign banks and trade finance transactions (LC, Remittance) to avoid any possible losses arising from two countries battle of sanctions.  More analysis and discussions is required with all stakeholder to know, how it can affect us and way-out to overcome the future uncertainties. The better prediction, the better prevention.


Salim Ahmed is a banker & analyst




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