Implementation of Targeted Financial Sanctions

The FATF requires States to implement targeted financial sanctions related to proliferation financing under Recommendation 7.

Recommendation 7 requires countries to implement targeted financial sanctions to comply with United Nations Security Council resolutions that require countries to freeze, without delay, the funds or other assets of, and to ensure that no funds and other assets are made available to, and for the benefit of, any person or entity designated by the UNSC under Chapter VII of the Charter of the United Nations, pursuant to Security Council resolutions that relate to the prevention and disruption of the financing of proliferation of weapons of mass destruction.

Terrorism is, in the broadest sense, the use of intentional violence for political or religious purposes. It is used in this regard primarily to refer to violence during peacetime or in the context of war against non-combatants (mostly civilians and neutral military personnel).

Terrorist financing provides funds for terrorist activity. It may involve funds raised from legitimate sources, such as personal donations and profits from businesses and charitable organizations, as well as from criminal sources, such as the drug trade, the smuggling of weapons and other goods, fraud, kidnapping and extortion.

Terrorists use techniques like those of money launderers to evade authorities' attention and to protect the identity of their sponsors and of the ultimate beneficiaries of the funds. However, financial transactions associated with terrorist financing can be in small amounts which makes the detection and tracking of these funds challenging.

Proliferation refers to the development and use of nuclear, chemical, or biological weapons and their delivery systems (also referred to as weapons of mass destruction “WMD”), by state or non-state actors in violation of international agreements and export control regimes.

Proliferation can cover both the manufacture, acquisition, possession, development, export, transhipment, brokering, transport, transfer, stockpiling or use of WMD, all of which poses a significant threat to international peace and security.

Proliferation financing is therefore where state and non-state actors may access and use the formal financial system to raise funds, conduct payments to procure materials and goods needed for proliferation, and other illicit financial activities connected to proliferation efforts. Countering the financial flows related to proliferation plays an important role in global efforts to counter the proliferation of WMD.

Proliferation financing is more than simply the payment for goods or the financial services that directly support the procurement of goods and development of WMD. It can also include:

• the raising of funds and revenue-generating activities that fund proliferation efforts. With regards to the DPRK (Democratic People’s Republic of Korea, or North Korea) in particular, the UNSC has assessed that funds generated from revenue-raising activities and illicit financial networks may be used for the WMD development by the DPRK.
• the financial and corporate networks and services that sustain these activities. These financial networks and activities may not be directly connected to the physical flow of WMD-related goods but enable proliferators to access and use the global financial system.

The National Sanctions Secretariat (NSSEC) has issued in-depth guidance on the implementation of targeted financial sanctions to counter proliferation finance under the United Nations (Financial Prohibitions, Arms Embargo and Travel Bank) Sanctions Act 2019, which can be accessed here.

United Nations Regime

The United Nations Security Council Consolidated List (The Consolidated List) includes all individuals and entities who are subject to measures imposed by the UN Security Council. This list may be accessed here. This list is also available on the website of the Financial Intelligence Unit, and is disseminated to reporting persons, investigatory authorities, supervisory authorities and any other relevant public and private agencies, registered on the goAML platform.

A summary of the current UN sanctions regime may be accessed here.

Of particular relevance to FSC Licensees are those United National Security Council Resolutions (UNSCRs) that include targeted financial sanctions against designated persons to combat terrorist financing or proliferation financing. These include:

• UNSCR 1267 (1999) and it successor resolutions including UNSCRs 1988 (2011) and 1989 (2011) concerning Al-Qaida, ISIL (Da'esh) and the Taliban;
• UNSCR 1718 (2006) and its successor resolutions concerning the Democratic People’s Republic of Korea (DPRK); and
• UNSCR 2231 (2015) concerning Iran.

Pursuant to Section 18 of the Act, the NSSEC gave public notice of the Consolidated List. Simultaneously, it has issued an Explanatory Note on the implementation of United Nations Sanctions Measures which have been published in the Government Gazette of 5 October 2019. Both documents can be consulted here.

Pursuant to Sections 9 and 10 of the UN Sanctions Act, the National Sanctions Committee (NSC) plays a central role in the Domestic Designation Regime, particularly in the implementation of UN Security Council Resolution 1373 related to counter-terrorism.

The NSC is empowered for the domestic designation of individuals and entities involved in the terrorist activities or the financing of terrorism. As per Section 11 of the UN Sanctions Act, the FIU and the NSSEC are to ensure that:

• The list of designated persons or entities is disseminated promptly to all relevant parties 
• Updates to the list are communicated effectively 

The list of designated parties can be accessed here.

FSC Licensees must also regularly consult the newspapers for any notice which may be issued by the NSSEC and immediately act upon it.

The FSC is responsible for supervising and enforcing compliance with targeted financial sanctions and proliferation financing obligations with regards to the reporting persons over which they exercise supervisory control or oversight.

The FSC is therefore required, under section 40(2) of the UN Sanctions Act, to supervise and enforce compliance by its Licensees with the requirements of the UN Sanctions Act.

In line with its supervisory functions, the FSC monitors compliance of the following obligations of its licensees amongst others:

1. To what extent are funds or other assets of designated persons and entities and those acting on their behalf or at their direction identified and such persons and entities 13 prevented from operating or from executing financial transactions related to terrorism and proliferation? ; and
2. To what extent do licensees comply with and understand their obligations regarding targeted financial sanctions relating to financing of terrorism and proliferation? .

To this end, the systems and controls of Licensees must be adequate to enable them to meet these obligations.

FSC Licensees should familiarize themselves with their legal obligations as related to targeted financial sanctions found in the Act, as well as the NSSEC’s Proliferation Financing Guidance.

Licensees are also encouraged to consult Public Notice and Explanatory Note and any other guidance which may be issued by the NSSEC.

The FSC has also set out interpretive guidance for its Licensees on how to apply preventive measures and internal controls in relation to Anti-Money Laundering and Countering the Financing of Terrorism (AML CFT) in its Handbook, which is available here.

In addition, Licensees must have particular regard for the following matters relating to their targeted financial sanctions obligations.

Licensees should have effective, up-to-date systems to screen their client database, verify the particulars of customers and transactions against the UN Consolidated List and the Designated Parties list, appropriate to the nature, size and risk of the Licensee’s business.

A Licensee’s screening system should enable the Licensee to maintain an up to date understanding of its clients through the life cycle of the client relationship. At the very least, screening should take place when establishing a new relationship, and subsequently at regular, but sufficiently frequent, intervals and upon trigger events (such as a change in directors or ownership) or when a UN Consolidated List or the List of Designated Parties is updated. It is good practice to carry out screening whenever a client’s identification data changes.

The provisions are applicable to persons and entities specifically designated on the lists, as well as those who are acting on behalf of or at the direction of designated persons or entities and/or those who are owned or controlled by them, directly or indirectly.

As a result, Licensees should not only focus on the names of persons and entities listed on UN Consolidated List, but also identify the persons and entities linked to them.

Each incoming and outgoing transaction should similarly be screened for a potential match with UN Consolidated List and Designated Parties List. Screening should be focused at a point in the transaction where detection of sanctions risk is actionable – where a transaction can be stopped and funds frozen if required – and before a potential violation occurs.

There is no obligation to have automatic screening software to comply with targeted financial sanctions obligations. Using the publicly available UN Consolidated and Designated Parties List, which can be downloaded from the UN, FIU or the NSSEC websites, Licensees can manually screen their clients against the list of designated parties.

If the Licensee is a large institution, it will likely not be appropriate to screen manually given the scale of its business. Adequate records should be kept regardless of whether manual or automatic screening is used. The FSC expects that Licensees be able to evidence that clients have been screened against the UN Consolidated List and the Designated Parties list.

Licensees should also be wary of an over reliance on automated screening. Automated (third party) systems may not necessarily capture the Designated Parties List. Licensees also need to ensure that automated systems are adequately tested for accuracy, properly calibrated and that the parameters that are set for screening within those systems are appropriate for the nature and size of their business. The legal obligations and liability of Licensees are not abrogated simply because they may rely on third party automated screening systems.

Where Licensees utilise automated systems, it is good practice for these systems to be able to make ‘fuzzy matches’, namely those that are able to identify similar or variant spellings of names, name reversals, digit rotations, character manipulation, and so forth, to ensure all related, connected persons and entities are captured in the screening.

The frequency of periodic screening should be appropriate for the particular business model, clients, and transaction volume of the Licensee. Licensees should consider whether screening on a weekly or even on a daily basis is appropriate. Weekly screening is unlikely to be adequate for many business models and in such cases, more frequent screening will be required.

Failure to fulfil targeted financial sanctions obligations may give rise to a criminal offence under sections 23(5) and/or 24(2) of the UN Sanctions Act.

An alert that is generated by a potential match might not, on its own, be an indication of sanctions risk. It should act as a trigger which can be confirmed or discounted with additional information gained through further investigation. The Licensee should maintain adequate records of these investigations.

Determining a positive match can often prove challenging due to a range of variables including language, cultural nuances, spelling, abbreviations, and aliases. UN Consolidated List, as do others, contain other identifying information to assist in the identification of a positive match or false positive.

Licensees should have adequate procedures for identifying, whether name matches are a positive match and immediately reporting to the NSSEC if a designated or listed party is identified. This procedure should cover for example, prohibition to deal with funds or other assets or make fund or other assets available to the designated or listed party, alerting senior management, reporting to the NSSEC and the FSC, and making a Suspicious Transaction Report (STR) to the FIU.

This procedure should be completed within 24hrs.

The templates to be filled in by licensees when reporting to the NSSEC and FSC of a positive match and details of the funds and assets of a designated or listed parties are listed in the Reporting section below.

A Licensee may be criminally liable should a designated person’s funds be moved while a Licensee awaits confirmation of a match.

As set out above, the process for identifying matches should capture the directors, beneficial owners of corporate customers and any third-party payees.

In the event that a true match with a listed/designated person is identified by an FSC Licensee, the match and any associated asset freezing should be reported immediately to the NSSEC and the FSC – see contact details below. The same report should be submitted to both competent authorities.

The reporting template can be accessed from the NSSEC website:

• Template for Reporting on Positive Match under section 25(2) of the United Sanctions Act 2019
• Template for Notification to the National Sanctions Secretariat under section 23(4) of the United Nations Sanctions Act 2019

An STR should also be filed with the FIU in line with Section 39 of the UN Sanctions Act.

In the event of a positive match, licensees are prohibited to deal with funds or other assets or make funds or other assets available pursuant to Sections 23 and 24 of the UN Sanctions Act.

In other words, this means ceasing any dealings and securing the funds and other assets, including financial assets and economic resources, that are owned or controlled, directly or indirectly, by the persons or entities designated by the UNSC or the NSSEC. This also encompasses, other financial assets and economic resources of persons or entities acting on behalf of, or at the direction of, those designated by the UNSC or NSSEC.

Licensees must also ensure that any funds or other assets, including financial assets and economic resources, are not made available to or for the benefit of designated persons or entities, persons or entities owned or controlled by them, or persons or entities acting on their behalf or at their direction.

What this means in practice is that:

• Licensees are required to act without delay. Licensees are therefore under an obligation to take appropriate steps even if there is a there is a time lag by domestic authorities in circulating a notification to freeze;
• In particular, new freezes are required to be implemented immediately, and without prior notice to the person;
• Licensees must not close the account of any designated person identified as an existing client, as this could result in funds or economic resources being made available to the designated person;
• The obligation to report and freeze extends to attempted as well as future transactions. Where a transaction is attempted and monies or other assets have been passed to a Licensee with a view to completing the transaction, these monies or assets must not be handed back to the entity if the transaction is aborted following a match; and  
• The obligation to freeze covers funds and other assets e.g. non-cash assets such as wills, real estate deeds, boats, jewellery, corporate licenses etc. However, where assets are frozen, there is a requirement to maintain the value of such an asset.

FSC Licensees will be informed of a designation removal or unfreezing order in the same manner that they are informed of a new designation.

In limited circumstances, certain designated persons may be granted exemptions from targeted financial sanction freezing and prohibitions. The exemptions allow for designated persons to access funds to pay for basic living expenses or extraordinary expenses, and to protect the rights of bona fide third parties. UNSCRs 1718 and 2231 also include considerations with regard to contracts, agreements or obligations that arose prior to the date on which accounts became subject to targeted financial sanctions. Guidance on these issues can be provided on a case by case basis to FSC Licensees by the NSSEC – see contact details below.

• Financial sanctions apply to all clients and all transactions, there is no minimum financial limit.
• Politically Exposed Persons (PEPs) can be, but are not necessarily designated persons under targeted financial sanction regimes. The requirement to identify clients that are PEPs and the requirement to identify clients that are designated persons for targeted financial sanctions are separate obligations.
• The targeted financial sanctions regime is not the same as the FSC’s enforcement regime, which sanctions Licensee’s for non-compliance with their AML/CFT and targeted financial sanctions obligations.

FSC Licensees should contact the NSSEC for all enquiries relating to asset freezing or other financial sanctions, including guidance on exemptions or authorization requests, and/ or to report a positive match.

• The NSSEC website: nssec.govmu.org;
• Email - nssec@govmu.org; or
• Telephone: +230 201 1264 or 201 1366.

For reports to be made to the FSC, Financial Institutions may send these to the FSC at TFsanctions@fscmauritius.org .

The FATF published the Complex Proliferation Financing and Sanctions Evasion Schemes report which reveals that significant vulnerabilities remain across the global financial system in countering the financing of weapons of mass destruction (WMD).

The report provides a detailed analysis of the evolving methods and techniques used to evade PFrelated sanctions, including those imposed under Recommendation 7 of the FATF Standards, as well as other national and supranational regimes beyond the FATF Standards. It outlines how proliferation networks are sourcing dual-use goods, technologies, and knowledge—often through procurement networks and front companies—and using various financial channels to access the global financial system.

The report can be accessed here.