44 – Financial sanctions: Updated guidance on the freezing provisions

Fredrik B. GRIMSTAD: Hello and welcome Økrimpodden. We have previously talked a lot about sanctions in the podcast and now we have been lucky enough to get the Ministry of Foreign Affairs involved. From the Ministry of Foreign Affairs, international law adviser Therese Simpson Johansen welcomes you. 

Therese Simpson JOHANSEN: Thank you for that, thank you for that. Thank you very much for allowing me to come. 

GRIMSTAD: Can't you start to talk about what role the Ministry of Foreign Affairs has in this sanctions regime? 

JOHANSEN: Yes, I can do that. The Ministry of Foreign Affairs, we are then the so-called regulatory owner. We are the ones responsible for implementing the sanctions in Norwegian law.

GRIMSTAD: Many who listen to this podcast probably have somewhat different experiences with the sanctions regulations and what they are. Some work in reporting companies, but as we know, the Sanctions Act also applies to all Norwegian businesses and citizens. If we start a bit from the beginning, what exactly are sanctions? 

JOHANSEN: Yes, so sanctions are a non-military security and foreign policy instrument, and it is an integral part of Norway's foreign and security policy, and a very important tool for us. The purpose of sanctions is to influence undesirable behaviour. We try to provide incentives or force change, either by providing financial incentives for them to change their behaviour, or by limiting those listed's financial ability and access to money to commit the actions that we want to influence. We have many different types of sanctions. We have arms embargoes, we have travel restrictions, we have import and export bans. But the freezing guide we are going to talk about here today is limited to the so-called freezing provisions, which are a subcategory again of the financial economic sanctions. 

GRIMSTAD: Today (30.06.2023/XNUMX/XNUMX) you have published a new one freezer supervisor. The previous one was from 2018, and then the sanctions regulations looked very different, I would say. What is the new freezer guide? What is written in it? 

JOHANSEN: The very first version of the freezer guide came out in 2016, and then it was updated in 2018. Now, when we write 2023, we have a new Sanctions Act in place from 2020-2021, and not least an explosive increase in the use of sanctions. And then I think in particular of the sanctions against Russia, which are historic, extensive, and hit Norwegian actors in a completely different breadth and scope than what we have seen previously. So then we thought that now is the time to update the Freezer guide. 

GRIMSTAD: It will then provide guidance to companies on how to work with freezing of funds. 

JOHANSEN: Yes, that's right. 

GRIMSTAD: How is this guide structured? 

Therese Simpson Johansen: It consists of two parts. It is first part 1 which gives a basic introduction to the freezing regulations. It is on a fairly general and general level. And then we have a part 2 which is a FAQ, frequently played questions and answers. This part is going to be much more dynamic and develop over time than what we have seen so far. We see a great need to provide guidance on specific questions more frequently and while it is ongoing, while we receive new questions. 

Fredrik B. Grimstad: How often do you expect to update that FAQ? 

Therese Simpson Johansen: It will be continuous if necessary. And then we think that part 1 should remain fixed. It will hopefully be comprehensive for a long time to come, but then we will work more systematically and dynamically with that part 2.

Fredrik B. Grimstad: These sanctions regulations, what policy is being pursued here? Where do the various sanctioned individuals and companies come from? 

Therese Simpson Johansen: Yes, so we currently have targeted sanctions against specific individuals or entities. They started with sanctions, which were what they called broad trade embargoes against entire countries and states and country situations. And we saw that it had major humanitarian consequences, and they then switched to having more targeted, smart sanctions. And it is largely based on selecting specified persons and units who are directly involved in the actions that we want to influence in a positive direction. 

Fredrik B. Grimstad: These sanctions come from the UN Security Council and the EU. Is it the case that Norway also implements its own sanctions beyond this? 

Therese Simpson Johansen: No, Norway does not have a tradition of implementing what we call unilateral sanctions, i.e. sanctions on its own. So in that way, we are in a rather special situation that deviates from many of our close collaboration partners in the sanctions field. To a large extent, we are the recipients of sanctions rather than the ones who create and develop sanctions. The few times we are a member of the UN Security Council, we are of course involved in influencing the content of the sanctions, and we have recently been. But in a normal situation, Norway is the recipient of sanctions that have been adopted either by members of the Security Council or the EU. It is also connected to the fact that we are a very small jurisdiction, and closely intertwined with the EU as an EEA member. We feel that there is a very strong desire from the business world and the players, who in any case have to deal with the EU sanctions, that we also align ourselves as closely as possible with the EU sanctions.

Fredrik B. Grimstad: Who has to deal with the Sanctions Act? 

Therese Simpson Johansen: Everyone in Norway is, strictly speaking. At least everyone who is exposed to sanction risk. That is to say, they deal with type of import-export or international transactions or something. In the Norwegian Sanctions Act, we have defined the scope of the law, and it applies very broadly. It applies on Norwegian territory, applies on board all Norwegian vessels, including aircraft and our platforms and other facilities that are under Norwegian jurisdiction. It applies to all Norwegian citizens and persons domiciled in Norway, and all enterprises registered in the register of enterprises, and all enterprises with regard to the business activities that they conduct wholly or partly in Norway. This means that everyone in Norway has an independent duty to comply with the sanctions regulations, and at least assess their own risk based on their own activities if they come into contact or may come into contact with the sanctions regulations. 

Fredrik B. Grimstad: Your freezing supervisor, who does it apply to? 

Therese Simpson Johansen: The freezing provisions apply, or apply, in particular to financial institutions and others subject to reporting obligations under the Money Laundering Act. This has to do with the fact that they are the ones who have the greatest risk of coming into contact with listed persons and entities, and in many ways become a kind of first line of defense to choke off access to financial means for those listed. But all those who conduct business internationally, or in other ways may come into contact with listed persons or entities, they must familiarize themselves with the sanctions regulations, and then the freezing supervisor can be a first stop to familiarize themselves with those rules. And we also expect everyone to make their own assessments and seek legal assistance if necessary. 

Fredrik B. Grimstad: We got into that now, so it's good for businesses to know that when you also do business internationally, you of course have to follow the sanctions regulations in Norway, and then we follow listed persons and companies that come from UN and EU, but also consider whether you are subject to sanctions regulations in the USA, UK and possibly other countries where they operate. And then there may be different people who are on the list, and you must then be aware of which authorities you have to report, and perhaps you also have to report both to Norway and other countries' authorities at the same time. But when is it, if we look at the Norwegian sanctions regulations here, when are businesses supposed to report? 

Therese Simpson Johansen: Anyone who freezes money or assets must report it to the Ministry of Foreign Affairs. And maybe say a little about the term "freeze", which might cause some misunderstanding or confusion. It comes from the English word freeze, freeze of assets. And then we have anglicized it to freeze in Norwegian. It is about throttling access to financial resources. A bank, quite a classic example, has a customer who is listed, then must ensure that the customer no longer has access to that account, cannot withdraw money from that account. I guess that's the very basics. If a bank has a customer who is on the list, and has stopped access to the account of the person on the list, then you must write a so-called freezing notice and send it to the Ministry of Foreign Affairs. In our Freezer Guide, we have a separate form for reporting in the event of a freeze that can be used. There are no special form requirements for reporting, but the form provides good guidance on the type of information we want to be reported on. 

Fredrik B. Grimstad: And when funds are then frozen, i.e. the person who has the account, for example, who is listed. What happens to the money in the account then? Can the people have any control over these funds at all, and can, for example, money still be deposited into this bank account? 

Therese Simpson Johansen: Yes, so the person on the list has not lost ownership of the funds. The extent to which it is possible to confiscate funds for those on the list is being discussed, but in that case it requires a separate legal basis. And the fact that a bank account has been frozen only means that a listed person will no longer have access to or have access to that money. But interest, for example, can still be credited to that account. It is also possible, for example, if you have to fulfill a contract that was entered into before the person or company in question was listed, then you can pay with liberating effect under this contract, as long as the money goes into an account that is frozen and as when the listed do not have access to. 

Fredrik B. Grimstad: And we talked about reporting to the Ministry of Foreign Affairs and forms. Where should this be submitted? 

Therese Simpson Johansen: It must be submitted to the Ministry of Foreign Affairs. Then we have an e-mail address called sanctionsjoner.mfa.no. And an innovation now with the freezing supervisor is that it will be sufficient to send the freezing notification to the Ministry of Foreign Affairs. The Ministry of Foreign Affairs will then consider forwarding it to Finanstilsynet, PST and Økokrim.

Fredrik B. Grimstad: In which situations can businesses be expected to freeze or freeze funds? 

Therese Simpson Johansen: It is difficult to answer in general, but if you have suspicions or indications that you are in possession of or have control over the funds belonging to a listed person, then these funds must be immediately frozen. In addition, it is very important to ensure that the funds remain frozen while further investigation is carried out. So freeze first, and if you are in doubt and need further guidance or dialogue with the Ministry of Foreign Affairs, contact us. But make sure that the accounts or funds are frozen as long as it is uncertain whether the funds may belong to a listed person. 

Fredrik B. Grimstad: The sanctions regulations oblige everyone to be careful and to carry out so-called due diligence, i.e. due diligence. What does that entail? 

Therese Simpson Johansen: Of course, this due diligence is a legal standard and the content of the due diligence requirement is not further specified and must be assessed concretely for each individual business. There is a risk-based approach to which investigations must be carried out. It's basically about common sense. Everyone is expected to make reasonable efforts to identify and limit sanctions risk. We are then talking about risk-based assessments that are adapted based on the nature, size, nature of the business and the likelihood of interaction with those on the list. I understand that this is something that is extremely demanding to do in practice, and it is frustrating that you cannot get a checklist or adapted concrete guidance on this. But it affects so widely, and so many different sectors are affected. And every business, every actor, knows its own market and contractual partner best. So it's about knowing your customer, knowing your business partner and the market in which you operate. It is extremely demanding for us at the Ministry of Foreign Affairs to be able to make a concrete statement about this. What is good to know is that if a sanction violation were to occur, one would be assessed against the question of whether one could or should have acted differently to determine whether it is a punishable violation. There is no objective responsibility here, so that any violation of sanctions entails criminal liability. But it is this standard of care that you are assessed against. Anyone who is exposed to sanction risk should draw up their own guidelines for how they can best comply with the sanctions. And those guidelines should reflect the individual's business model, the geographical area of ​​operation in which they operate, any special features of the business, and risk exposure with regard to customers, employees and the business in general. And the scope of this type of internal routines will depend on the nature of the business. For some it may be good enough to do this once, but for others you have to do this regularly. It can be very wise to identify whether there are certain aspects in the business or the value chain that should be the subject of special control or attention. Then, unfortunately, there is no standard model here, or simple answers, or one size fits all. We very much understand that it is sometimes felt to be uncomfortable to have to bear the risk yourself. Especially now that the sanctions regulations are hitting new players who have not been used to dealing with the sanctions regulations in the same way before. But as has been said, it is the individual business that is closest to its customers and business relationship, and which is then closest to identifying these red flags and deviations from normal behavior in the relevant market or sector in which it operates. And here there is also a great risk of circumvention and of trying to find new routes and trading partners. Especially if you are exposed to Russia and Belarus, as is the case now, then you should be extra careful in reviewing your own routines. Ask a few additional control questions where, for example, orders come from a new player with whom you may not have been in contact before. From the authorities' side, we cannot give concrete guidance on what are reasonable efforts to avoid sanction violations. No other country's sanctioning authority does that either. And we do not have the opportunity to give either a green light or a red light, but we can always provide guidance when it comes to general questions of interpretation and questions about what the regulations actually entail. Fredrick B. Grimstad: Can you give some examples of situations where it is obvious that a business must freeze funds? Therese Simpson Johansen: The obvious example is where a bank gets one of its customers listed on a sanctions list. Then the customer's funds must be frozen, and the customer must not be offered credit either. It is difficult to come up with substantial and concrete answers, but in the guide we have created a table with some classic typical cases, depending on the type of business, to which far the reporting obligations can belong. I encourage everyone to take a look at it.  

Fredrik B. Grimstad: Many of the listed persons may be involved in various complicated company structures, for example, have ownership via holding companies or others. What obligations does a business have, if, for example, a board member of a customer is listed? 

Therese Simpson Johansen: It depends on a closer assessment based on the question of what control the relevant board member has over the company. The freezing obligation applies to money and assets belonging to, held or controlled by listed persons. And as far as board members are concerned, it becomes a question of whether the person on the list has such a prominent role that they exercise actual control over the company. In the freezing guide, we have created a list of control questions that you can, for example, look at and assess to determine whether the person in question actually exercises control over a person or an entity. But on average, an ordinary board member will not have such a prominent position that he actually has control over the company. But it may be wise to implement some security measures to ensure that the person in question cannot dispose of or have access to the customer's funds or the company's account. 

Fredrik B. Grimstad: Do you have any examples to give of which people at corporate clients should be covered by a screening against sanctions lists? And then I think of the various companies that have set up various monitoring systems for all their transactions. It can of course be banks in particular, but also large listed companies.

Therese Simpson Johansen: This is basically a concrete risk-based assessment, which the business customer himself is the closest to evaluating. But the ones you mentioned, especially banks, credit companies, financing companies, they have obligations to have electronic monitoring systems, so-called screening tools. Other larger companies also use this type of screening tool to a greater extent. The basic principle is that it must be screened against the sanctions lists when a customer relationship is established and when a transaction is carried out. In addition, the customer base must be checked against the sanction lists when changes are made to them. What can be more demanding, however, is screening all transactions and questions about the extent to which financial institutions must step in and screen managers, real rights holders and so on. In addition to those who stand as formal owners, we know that it is very demanding to assess what the actual conditions are. It is incredibly important that one cannot blindly trust these electronic screening tools. If you have any suspicions or there are any indications of a listed customer or participant in a transaction that is not captured by the system, manual checks must also be carried out. 

Fredrik B. Grimstad: We have already talked about how if you get a hit, it is reported to the Ministry of Foreign Affairs, and then you report it to other actors. But some companies can now experience up to several thousand hits on sanction lists in the course of a week. What should a business do if it is unclear whether a person or company is listed? That is, when they get all these alarms. 

Therese Simpson Johansen: Yes, that is what we call false positive hits. And an innovation of our new freezing guide is that we have given some more in-depth guidance on what to do in precisely those situations. These are questions that we often get. We often saw that banks in particular, but also others, contacted us without having actually carried out an assessment of their own. They got a hit and sent it straight on to the Ministry of Foreign Affairs and asked for assistance. We will now have to tighten up on this, and we expect the businesses themselves to take greater responsibility for clarifying whether or not there is a false positive. All sanction lists contain information that should make it possible to identify the right person. The lists will normally contain obvious names, but also aliases, date of birth, citizenship and, not least, reason for listing.

If you are unsure, compare all available information about the person on the list against the one you have found. In some cases, it may also be appropriate to obtain information from the customer directly to clarify the matter. Ask the customer to provide documentation that makes it probable that there is no coincidence with the list match. In contrast to what applies under the money laundering regulations, it is not confidential to tell a customer or a business associate that there is uncertainty related to whether the person in question is listed. In the freezing guide, we have created a table of some practical examples. For example, you can imagine that you have a match on name similarity with a person who is listed as a member of the Russian military. Your customer has the same name, but the customer provides credible documentation showing that the person lives in Norway and works as a carpenter. This is highly likely to be a false positive and the funds should not be frozen. Another example. You have found a name match with a listed Syrian military leader. Your customer has the same year of birth, but a different address and different passport number. Further investigations do not provide clarity as to whether it is actually the listed person. Then it could be the same person as the person on the list and a possible attempt to circumvent the sanctions. And the funds must then remain frozen and the Ministry of Foreign Affairs must be contacted. There were only two examples that perhaps illustrate the extremes, while there are also more examples in this table in our guide. If you are still unsure after carrying out a thorough self-assessment, the Ministry of Foreign Affairs can of course be contacted, and you must then send a copy of the self-assessment that has been carried out, and all available information to which you have access. We then hope that this will put the businesses in a better position to clarify false positives themselves. And that will mean a much faster clarification, both for the customers and the banks. 

Fredrik B. Grimstad: Within this regime, we have something that is also called restraint. Are there any differences between banding and freezing? 

Therese Simpson Johansen: Explained a little simply, you can say that the effect is the same, and then it rests on very different legal grounds. The legal basis for restraining follows Section 17 g of the Police Act, while the freezing provision is authorized in the individual sanctioning regulations. When it comes to financial measures against persons suspected of terrorist activities, a distinction must be made between persons listed by the UN Security Council due to their association with either ISIL or Al-Qaeda, and persons who are subject to a decision on arrest pursuant to Section 17 g of the Police Act And the binding decisions were previously published on the website hvitvasking.no, but will now be published on pst.no. So it is therefore the case that everyone is responsible for keeping up to date on decisions published there, and having good routines in place that ensure that any funds are tied up immediately, that is to say within a few hours at the latest. 

Fredrik B. Grimstad: We have also talked a bit about banks and other companies that are subject to the money laundering regulations. Do you have any particular expectations of these actors compared to others? 

Therese Simpson Johansen: The Ministry of Foreign Affairs has been general in its guidance and has not set out any general expectations for companies that are obliged to report under the Money Laundering Act. Finanstilsynet has clarified that it is expected that all undertakings under supervision have good routines and systems in order to be able to comply with the sanctioning regulations. The Ministry of Foreign Affairs stands behind this. After all, these are also players who we expect to have a greater degree of professionalism than a pure private person or smaller companies. It is also important to mention that it follows from the money laundering regulations that banks, credit companies and financing companies must have electronic monitoring systems to identify transactions, since there are people who are subject to sanctions. The systems must identify persons who may be subject to sanctions, which have been carried out under Norwegian law, as well as transactions which may be associated with listed persons. There is also an expectation that such companies are aware of any weaknesses in the system they use for sanction screening. 

Fredrik B. Grimstad: And often such persons who are listed, or it is companies or countries or the like, the sanctions provisions often affect various conflict areas in the world. Because it is also a political tool. On the other side, you often have NGOs, i.e. organizations that carry out humanitarian work. And these here are dependent on using the financial system to finance their activities, also from Norway. And how should those who are obliged to report deal with this? 

Therese Simpson Johansen: Yes, I am very happy that you are asking that question, because it is very important to remind people of the social responsibility that reporting obligations have. We are talking in particular about these humanitarian exceptions that are built into the sanctions regulations, and the importance of avoiding what we call unintended negative consequences both for private individuals and civil society that are not intended to be affected by the sanctions. The freezing provisions are by no means absolute provisions. They must not prevent people from having absolutely essential expenses such as food, rent, medicines or legal assistance covered. I am not talking about legal assistance to be able to circumvent the sanctions regulations, but, for example, legal assistance to be able to counter a listing, if you believe that you have been listed on the wrong basis. These are provisions that also apply to the listed and listed entities. Even if you are listed, for example, because you are a member of ISIL or Al-Qaeda, you also have the right to access funds so that you can cover essential expenses for food and medicine. 

Fredrik B. Grimstad: Do you have any suggestions for how businesses can deal with this in practical terms? 

Therese Simpson Johansen: In practical terms, if you have a listed customer who needs access to very basic funds to cover expenses for food and rent and medicine, then you have to apply to the Ministry of Foreign Affairs for that. If the person in question is listed by the UN Security Council, then we must forward the application to the Security Council, which then, after a short procedure, finally decides whether these funds can be released.

Fredrik B. Grimstad: Something I also think about when businesses have to comply with these regulations. As we have talked about, there are different actors, but many are also obliged to comply with a good number of other laws and regulations, so they have established good compliance programmes. And in that connection, there is perhaps something about risk appetite, so it says something about the company perhaps having zero tolerance for being involved in sanctions violations, for example, or zero tolerance for money laundering and terrorist financing. Do you have any ideas about, is there a problem with de-risking, for example, linked to the sanctions regime? Is someone not willing to take a risk? What do you think about this? 

Therese Simpson Johansen: Yes, we see that as a challenge. What is very important to be aware of is that the good can become the enemy of the best, so to speak. Most of the sanctions regulations contain explicit exceptions to cover essential expenses, which I talked about earlier, but also this with humanitarian exceptions to be able to facilitate humanitarian activities. This is activity that is strongly desired by Norway and which is often financed directly or indirectly by Norway. From the authorities' side, we would like to encourage all Norwegian actors to make arrangements for humanitarian actors to carry out transactions that are covered by humanitarian exceptions. These humanitarian exceptions, most of the exceptions apply automatically, and then you do not need to apply to the Ministry of Foreign Affairs separately about it. We fully understand that, based on purely commercial and practical considerations, it can be tempting to simply reject all transactions to sanctioned countries. And we also know that these are transactions from which you don't necessarily make any money, and you have to work quite a lot with correspondent banks or others involved in the transaction to make it happen. But we see on the more political side that what we call over compliance or de-risking in the financial sector or other players is actively used by listed players to undermine the legitimacy and thus the effect of the sanctions. And aid and humanitarian assistance are absolutely essential in order to stem the instability and armed conflicts, terrorist activities and unwanted behavior that the sanctions seek to change. Therefore, we offer some extra guidance on this point when it comes to supporting humanitarian actors and facilitating humanitarian access. So if you are in doubt, contact the Ministry of Foreign Affairs and be aware of the social responsibility you have to facilitate this type of absolutely vital activity. We expect the Ministry of Foreign Affairs to make an active effort to assess the scope for this type of transaction to be carried out, thereby helping us to ensure that the sanctions are as accurate and targeted as possible and remain effective tools for our joint foreign and security policy. 

Fredrik B. Grimstad: Thank you very much for coming to us, Therese. 

Therese Simpson Johansen: Thank you very much for me. 

If you want to hear more about international sanctions, you can also listen to Økrimpodden episodes 32 and 36.