Sanctions 3: Duties of Subject Persons in Relation to International Sanctions

Following from the recent geopolitical developments in Ukraine, there has been a heightened interest in sanctions, specifically, those sanctions being imposed against Russia. Through this series of articles, we aim to provide a general overview of the notion of sanctions, consider the local framework through which sanctions function in Malta, illustrate the general obligations which subject persons are required to observe vis-à-vis sanctions and discuss a general overview of the sanctions imposed by the EU against Russia.

In this third article, we shall consider the additional duties of subject persons (under the PMFLTR) in relation to international sanctions.

There are a number of duties which both subject persons and non-subject persons must consider when considering international sanctions. As remarked in the previous article, all natural and legal persons in Malta (that is, subject persons and non-subject persons) are required to freeze any assets owned by a designated person or entity and report same to the Sanctions Monitoring Board (SMB).

In terms of the Prevention of Money Laundering and Funding of Terrorism Regulations (PMLFTR), Legal Notice 372 of 2017 (as subsequently amended), subject persons have four specific obligations. These obligations include the screening of new clients at onboarding stages and throughout the business relationship. In terms of Regulation 5 of the PMLFTR, every subject person is to take appropriate measures to identify and assess the risks of money laundering and funding of terrorism. Such measures are to be proportionate to the nature and size of the subject person’s business and is to also take into account risk factors such as geographical areas, transactions and the product or services provided.

Additionally, in order to comply with the requirements of the National Interest (Enabling Powers) Act, Chapter 365 of the laws of Malta (the “Act”), subject persons are required to embed in the aforesaid internal procedures and the following additional processes as required by Article 17(6) of the Act:

1. Regularly check the list of designations by the United Nations, the European Union and the SMB and regularly screen their client databases against these lists and immediately after any change which occurs to these lists;
2. Have in place and effectively implement internal controls and procedures to ensure compliance with the obligations arising out of Chapter 365 and any resolutions or regulations of the United Nations and the European Union; and
3. Immediately notify the SMB where any targeted property is identified and of any actions taken in relation to such property.

Finally, subject persons are also subject to anti-tipping off in relation to any freezing measures.

It should also be noted that subject persons are also exposed to administrative penalties where there is a breach of any of the above-mentioned additional obligations and that such penalties amount to between € 100 and € 300 in respect to every separate contravention; an administrative sanction of between € 300 and € 800 for contraventions which are deemed to be serious, repeated or systematic in nature, and the publication of that penalty. The SMB may, in conjunction with the imposition of an administrative sanction, also issue written directives requiring any person to take any action or measure to remedy such contravention. If the requested person does not adhere to the written directive, that person is liable to an administrative sanction of between € 100 and € 300. Furthermore, there is no appeal process available on the administrative sanctions imposed.

Where an administrative sanction of between € 300 and € 800 is imposed by the SMB, the Board may also recommend to the relevant supervisory authority to take any action or regulatory measure available to it and as may be appropriate in the circumstances. The result may be the potential withdrawal of the subject person’s license.

As of 7^th September 2023, the European Commission has also published a guidance paper aimed at economic operators on the implementation of enhanced due diligence measures to shield against Russian sanction circumvention. While the guidance aims to provide a general overview of the main points of consideration and the recommended measures to be undertaken, these measures are also noteworthy to subject persons and provide a useful addition to current measures which may already be in place. Access to this paper may be found on the following link:https://finance.ec.europa.eu/eu-and-world/sanctions-restrictive-measures/sanctions-adopted-following-russias-military-aggression-against-ukraine/guidance-documents_en

Subject persons are also required to immediately inform the Sanctions Monitoring Board wherever there is a sanctions’ hit as a result of their screening process. Furthermore, any resultant measures which are taken considering such hits are also to immediately be reported to the Sanctions Monitoring Board. The Sanctions Monitoring Board also stipulates that such an obligation to report shall also apply in cases of attempted transactions, and that any failure to do so constitutes an offence under Maltese law. It should be noted that any reports made in terms of Chapter 365 do not result in a breach of professional secrecy and the protection and confidentiality of the identity of the person reporting is guaranteed in terms of the Act. It should also be noted that there is no criminal or civil liability where a freezing measure is carried out in good faith and was done for the purpose of complying with legally binding sanctions.

Reports made to the Sanctions Monitoring Board may be made by email through sanctions.smb@gov.mt, or in writing to: The Chairman, Sanctions Monitoring Board, Ministry for Foreign and European Affairs and Trade, Palazzo Parisio, Merchants Street, Valletta, Malta, with supporting documentation to also be provided.