Sanctions and restrictive measures – expectations and requirements

The rules on sanctions and restrictive measures apply to all Norwegian companies. In addition to providing an overall review of the regulations in this article, we pay particular attention to companies subject to reporting obligations under the Money Laundering Act and give examples of how the regulations on sanctions affect these companies.

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What are sanctions and restrictive measures?

Sanctions and restrictive measures are political and economic coercive measures that states and international organizations use against other states, organisations, enterprises and persons. Such measures are typically used if national or international interests or security are threatened. Sanctions and restrictive measures usually contain restrictions of various kinds, such as economic restrictions, export and import restrictions, travel restrictions, arms embargoes or trade restrictions for specific types of goods and services. The measures often have the purpose of changing policy or the way of acting, so that international obligations are complied with.

Relevant national and regional regulations

As a general rule, Norwegian companies only need to comply with the Norwegian regulations on sanctions and restrictive measures. However, the Norwegian regulations implement sanctions and restrictive measures that have been adopted by both the EU and the UN. In some cases, depending on the company's operations, other regulations may also apply, such as US OFAC sanctions. It may be relevant, for example, if the company has American customers or carries out transactions in USD. This article is only about sanctions and restrictive measures that are applicable under Norwegian law.

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In the UN, it is the UN Security Council that takes decisions on sanctions and restrictive measures to maintain or restore international peace and security. The sanctions pursue a number of objectives, and the measures have ranged from comprehensive economic and trade sanctions to more targeted measures such as arms embargoes, travel bans and economic or trade restrictions. Other examples are an overview of terrorist organizations and people associated with them, such as Daesh, the Taliban, Al-Qaeda and al-Shabab.

EU

EU sanctions can be aimed at authorities in third countries, or companies and individuals, such as terrorist organizations and terrorists. These measures may include, among other things, trade restrictions (import and export bans) and financial restrictions. The measures from the EU support the EU's common foreign and security policy goals and UN Security Council resolutions. The EU has implemented a number of sanctions and restrictive measures as a result of conflicts in certain geographical areas.

Norway has list leader persons and companies based on the resolutions from the UN and the EU, so that these sanctions and restrictive measures are implemented in Norwegian law. For sanctions from the UN, this happens against the background of Act on the implementation of the binding decisions of the UN Security Council (external link), and for restrictive measures from the EU it takes place against the background of regulations laid down on the basis of Sanctions Act (external link).

The rules apply to any Norwegian registered company.

What obligations do the companies have?

All Norwegian-registered companies are obliged to comply with the sanctions and restrictive measures implemented in Norwegian law, including antifreeze belonging to persons, groups or businesses that are subject to such restrictions.

Especially for obliged entities

All companies are obliged to report frozen funds to the Ministry of Foreign Affairs and the Norwegian Tax Agency. To whom it must be reported depends on whether the freeze is based on the rules on sanctions and restrictive measures or an individual decision or order from the courts. In addition, reporting obligations under the Money Laundering Act have an obligation to report suspicious transactions to the Financial Intelligence Unit (EFE) in Økokrim. In other words, the duty to report according to the rules on sanctions and restrictive measures is in addition to the general reporting duty under the Money Laundering Act.

The rules on sanctions and restrictive measures are not part of the Money Laundering Act and the purpose of these is not necessarily to prevent money laundering or terrorist financing. For companies subject to reporting obligations, such rules will therefore apply plus the obligations arising from the Money Laundering Act.

obliged entities are obliged not to trade with, or enter into customer relationships with, persons and businesses listed on the sanctions lists. In practice, this means that the obliged entity must screen its customers against names that appear on the sanction lists. On that occasion, "false positive hits", as a result of name similarity between the customer and the listed person or company, will often be a challenge. An assessment of such "false positive matches" must be made against the background of the information the company otherwise has about the person or the company, for example date of birth, citizenship etc. If the company is unsure whether the match is real, the Ministry of Foreign Affairs can be consulted after the reporting company has made his independent assessment.

It is expected that obliged entities implement suitable measures to ensure that the companies are not misused to carry out transactions or other dispositions that are in breach of sanctions and restrictive measures. In order to ensure that employees in the company carry out the tasks necessary to comply with these rules, it is also expected that reporting companies have their own procedures and guidelines for sanctions and restrictive measures.

Violations of the rules on sanctions and restrictive measures are punishable by fines or imprisonment. There can therefore be serious consequences if the company acts in breach of sanctions and restrictive measures.

Clarification of who is the real rights holder

One of the central duties for obliged entities under the Money Laundering Act is the duty to carry out customer due diligence measures. As part of the customer due diligence measures, identification and verification of the identity of beneficial owners must be carried out. The obligations relating to sanctions and restrictive measures also require that the company is able to identify and register the customer and any beneficial owners. There are a large number of control points that must be reviewed by the obliged entity in order to check which natural person is the beneficial owner. In some cases, it can prove very demanding to carry out this part of the customer due diligence measures. If the customer due diligence measures are not possible to implement, the conclusion may be that the customer relationship should not be established or terminated.

If the obliged entity has not been able to identify the beneficial owner, or registered the wrong natural person, there is of course a high risk that the beneficial owner will not be subject to screening. This is another reason why the company must ensure that they have control over who are the real rights holders in the business customer.

The challenges when the customer hides behind straw men

There is a risk that those who are sanctioned or operate in an area where restrictive measures apply will seek to evade the restrictions that sanctions and restrictive measures entail. A simple way to avoid this is to carry out the transactions through one or more straw men or companies that operate as front companies.

There are several examples of sanctioned persons or companies having carried out transactions through companies that have no real activity beyond being a shell for the person behind the transaction - also known as "shell companies". In some countries, it is very easy to establish such shell companies, without the authorities questioning what the purpose of the company is or who is behind it. This makes it easy for listed persons to set up a company abroad, and then carry out transactions in and out of Norway. In this way, the origin of the funds, to whom the funds are transferred or where the funds originate are hidden.

There are actors (professional advisers) who have specialized in assisting their clients in hiding beneficial owners, the origin of the funds and removing traces of the connection between the funds and the owner. The professional money launderers know the measures of the obliged entities to protect themselves against money laundering and terrorist financing and know how to avoid the control measures and reduce the risk to avoid funds being stopped or frozen by the companies. Incorrect information about who the beneficial owners, use of straw companies and straw men, fictitious invoices and incorrect explanations of transactions are just some of the methods used.

There are many ways to channel funds through straw men. We have conducted a survey among Norwegians which showed that one in five Norwegians was inclined to act as straw men. If we are to rely on the results of the investigation, there is a high risk that the reporting companies will not discover that the customer is acting on behalf of unknown backers. You can read more about this survey here .

Prohibition on making funds available

A freezing obligation means that persons liable to report are prohibited from making money or assets available to persons, groups or enterprises that are on the list. According to the Money Laundering Act, for example, banks and other financial institutions must have electronic monitoring systems. It is expected that these systems will enable the companies to be able to immediately freeze funds belonging to persons and entities listed on the lists.