International sanctions are key tools used by the international community to regulate the behaviour of states. They aim to align state conduct with international law or to contain or prevent regional threats or conflicts without violating a country’s sovereignty and independence. Sanctions are effective but must be handled with care, as they can have serious repercussions and unintended consequences that negatively affect the lives of innocent civilians. Sanctions can take various forms, primarily diplomatic, economic, and military. They may target entire countries or, more commonly, specific individuals, companies, or entities. Typically, sanctions impose various restrictions, which may include limitations on trade, travel, supply chains, the provision of financial services, and the freezing of assets and funds. In more severe cases, sanctions might also include arms embargoes, no-fly zones, naval blockades, or even military intervention.
In Malta, the sanctions regime is governed by the National Interest (Enabling Powers) Act (“the Act”), Chapter 365 of the Laws of Malta. This Act facilitates the direct implementation of sanctions imposed by the United Nations Security Council through its resolutions. Additionally, as a member of the EU, Malta must comply with EU Council and Commission Regulations that impose sanctions or restrictive measures.
The Act applies to all individuals in Malta, residents of Malta, and Maltese citizens, regardless of their location. It also extends to vessels, aircraft, or any means of transportation registered in or belonging to Malta, or those traveling to or from designated countries as determined by the responsible Minister.
The Act establishes the Sanctions Monitoring Board (“SMB” or the “Board”), which is tasked with monitoring the implementation of sanctions in Malta and proposing individuals or entities for designation by the UN Security Council, or the delisting of such individuals. The Board also possesses the authority to grant access to frozen assets or funds necessary for the basic needs and essential services of designated individuals. Moreover, the Board can request relevant documents from any person or entity to perform its functions and can determine whether specific actions fall within the sanctions prohibitions.
Financial sanctions play a crucial role in the financial services sector. They often require individuals or entities that hold assets belonging to designated individuals or entities to freeze those assets and prohibit any benefits from these assets to those individuals. Entities licensed by the Malta Financial Services Authority (“MFSA”) are legally obligated to be aware of and comply with all international sanctions. Continuous vigilance is necessary to ensure that these entities remain informed about current sanctions and do not engage with assets or funds belonging to affected individuals, as is also required by the Prevention of Money Laundering and Funding of Terrorism Regulations (“PMLFTR”).
US and third-country sanctions should also be taken into account, although they are not enforceable in Malta due to the EU Blocking Statute (Council Regulation (EC) No 2271/96). Violating US or third-country sanctions may expose the entity to the same sanctions and risks being added to blacklists in the sanctioning country. It is also prudent to understand the reasons for the imposition of such sanctions and factor them into risk assessments.
Currently, the Maltese national sanctions include the Measures in Support of Actions Addressing Smuggling Activities in the Central Mediterranean Regulations, 2020, which prohibit the direct or indirect export, transshipment, sale, supply, or transfer of any vessels to Libya from Malta, subject to specific conditions.
Article 6 of the Act outlines the consequences for breaching sanctions, stipulating that any person who violates regulations under the Act, EU Regulations, or a UN Security Council Resolutions shall be guilty of an offense, punishable by imprisonment for a term ranging from twelve months to twelve years, or a fine between €25,000 and €5,000,000, or both. Corporate entities found guilty may be fined between €80,000 and €10,000,000. Additional penalties may include court orders to suspend or revoke any licenses, permits, or authorizations to engage in any trade, business, or profession. The court can also order the dissolution of the corporate body responsible for such breaches or disqualify it from receiving public benefits. Directors, managers, secretaries, and similar officers of a guilty corporate entity may also be held accountable unless they can prove to the court that they were unaware of the breaches or exercised all due diligence to prevent them.
Furthermore, Article 17(6) imposes stricter obligations on any legal or natural person engaged in relevant activities or financial businesses, designated as ‘subject persons.’ This includes the requirement to establish internal controls and procedures to regularly screen client databases against applicable sanctions lists, especially following any changes. Should a positive match be identified, subject persons are obligated to inform the SMB and the MFSA, detailing the actions taken.
It is essential for subject persons to conduct risk assessments when onboarding new clients and to periodically update risk assessments for existing clients to maintain compliance. A key factor influencing risk assessments is the country in which the client operates or is located, as higher-risk countries suggest a greater likelihood of involvement in money laundering, terrorist financing, or proliferation financing.
Understanding geographical risks is a crucial component of any Business Risk Assessment (“BRA”), and a country’s exposure to money laundering (“ML”) risks should be assessed through a standardized process or methodology. These evaluations should not only consider the reputation of specific jurisdictions but should also explore the actual risks present within those jurisdictions.
Therefore, it is advisable for each subject person to create a country report or Jurisdiction Risk Assessment (“JRA”). This involves reviewing relevant countries and categorizing them based on their inherent risks associated with ML and Terrorist Financing (“TF”). These reports should consider a wide range of factors, including the level of transparency and rule of law, the extent of corruption, conditions in war-torn countries or regions of civil unrest, significant levels and types of crime, the threat of terrorism, Mutual Evaluation Reports (“MERs”) issued by the Financial Action Task Force (“FATF”) or its regional bodies, any existing sanctions, and the condition of the judiciary in those countries.
While subject persons can utilize reports prepared by third parties, the benefit of creating their own reports is that they can be customized to align with the specific business operations of the subject person. This customization makes the risk ratings more relevant and accurate, ultimately assisting in determining whether a transaction aligns with their risk appetite. Additionally, having these tailored reports aids subject persons in fulfilling their regulatory obligations, as they will incorporate all factors identified by national anti-money laundering (“AML”) authorities.
In a JRA, a subject person may identify a jurisdiction as high risk for various reasons. For example, a jurisdiction may be deemed high risk due to a heightened threat of terrorist attacks, while another may be flagged for the lack of transparency surrounding its legal entities or the presence of significant organized crime groups operating within its borders.
These JRAs will enable subject persons to mitigate risks more effectively since, by understanding the reasons behind a country’s high-risk classification, tailored measures can be implemented. For instance, transactions involving customers linked to countries with elevated terrorism risks should be closely examined, regardless of the transaction value. Conversely, for customers associated with countries characterized by a lack of transparency, scrutiny should focus on substantial or complex transactions and transfers from companies with identical ultimate beneficial owners.
Regulation 11(1)(c) of the PMLFTR mandates that subject persons undertake appropriate Enhanced Due Diligence (“EDD”) measures when engaging with natural or legal persons linked to non-reputable jurisdictions. This regulation underscores the necessity of having well-prepared and informed JRAs. It is essential to note that the PMLFTR does not prohibit establishing business relationships or conducting transactions with natural or legal persons from non-reputable jurisdictions. Instead, it requires subject persons to implement EDD measures that aim to mitigate and, whenever possible, neutralize the ML/TF risks associated with such jurisdictions. Continuous monitoring of customer activity, including business activities and trading, is necessary to identify any changes in geographical exposure over time, assess whether these changes influence the overall risk exposure of the subject person, and determine if there is a need to revise and update the JRAs.
In conclusion, subject persons must be aware of and comply with applicable international sanctions, integrating these considerations into their JRAs to enhance the accuracy of their assessments.
For more information about the drafting and compliance of country reports, feel free to contact us.
