Supervision of parties on sanctions lists

Sanctions are international measures aimed at maintaining peace and security in the world and ensuring compliance with human rights and liberty. Measures, which are necessary to suppress undesirable behavior may, for example, be applied to coerce states or individuals in certain states to change their behavior or to restrict their access to resources.

Duties of obliged entities

Obliged entities must meet certain requirements set out in Act no. 68/2023 on the Implementation of International Sanctions and Freezing of Funds. In this regard, special attention is drawn to the requirements of the provisions of Article 10 and Article 13 of the Act, which include, among other things, the following measures:

  1. Appropriate systems and/or processes and procedures must be in place to assess whether customers and beneficial owners are on international sanction lists. A system is to be understood as an IT system or database that always retrieves the most up-to-date information about those on sanction lists. Those who have been granted an exemption from the requirements of these systems on the basis of the first paragraph of Article 13, however, must always have processes and procedures in place to assess whether their customers and beneficial owners are on sanction lists. Sanctions list checks must be performed both at the beginning of the business and regularly during the contractual relationship. It is important that obliged entities regularly reassess the need for frequent monitoring.

  1. Funds and economic resources (hereinafter "funds") must be frozen if it turns out that a customer is on a sanctions list, in accordance with the regulations established on the basis of Act no. 68/2023. This refers to, inter alia, funds owned by the customer, whether it be directly or indirectly (i.e. controlled by the customer), or whether customers have them in their custody or manage them. If the customer's ownership of the funds is only partial, the freezing shall extend to them in their entirety.

  1. The owners of the funds, the Ministry for Foreign Affairs, the Financial Intelligence Unit and the Central Bank of Iceland shall be notified of the freezing of the funds.

  2. The Central bank of Iceland and the Financial Intelligence Unit shall be notified if there is suspicion that a customer or a beneficial owner has made arrangements to evade freezing of funds according to Article 10 of Act No. 68/2023.

Notifications regarding the freezing of funds and other information relating to the Act on the Implementation of International Sanctions and the Freezing of Funds shall, as appropriate, be sent to: the Ministry for Foreign Affairs at postur@mfa.is, the Financial Intelligence Unit at pt@hersak.is and the Central Bank of Iceland at sedlabanki@sedlabanki.is.

Anyone who fails to fulfil the obligations set down in the Act on the Implementation of International Sanctions and the Freezing of Funds may be subject to penalties in the form of, among other things, daily fines or administrative fines.

Further explanations regarding sanctions can be found in the guidelines of the Financial Supervisory Authority and in the educational material of the steering group on measures to combat money laundering and terrorist financing. More information can also be found on the Icelandic Government's list and on the European Union's sanctions map.

Sanctions due to Russia's military actions in Ukraine

The Central Bank draws the attention of obliged entities to the fact that Iceland has approved all the political declarations of the European Union (EU) regarding sanctions against Russia due to the invasion of Ukraine. Iceland has therefore committed itself to implementing the EU's sanctions against Russia due to the state's military actions in Ukraine. The sanctions include, among other things, the freezing of funds, as well as other measures related to the financial sector, and the Central Bank of Iceland urges obliged entities to fully familiarise themselves with who they apply to.

In light of circumstances, these sanctions frequently change, and obliged entities are advised to pay close attention to changes in the government's sanctions list.

All of the EU's sanctions against Belarus have also been implemented in Iceland, following the Russian invasion of Ukraine and Belarus' participation in these attacks.

Challenges associated with the sanctions

The aforementioned sanctions may present certain consequential challenges for obliged entities. Some obliged entities may have decided in advance to reject all payments to Russia and Ukraine instead of conducting an independent assessment of each case. Restrictions on access to banking services of this kind can lead to financial exclusion, as well as contribute to the growth of the illicit economy. On the other hand, it is clear that in some cases obliged entities have the duty to refuse providing service to customers if it is not possible to carry out due diligence on them in accordance with Act no. 140/2018 on Measures against Money Laundering and Terrorist Financing. Obliged entities are also permitted to refuse and/or limit services to customers who do not comply with the risk appetite of the obliged entities. The Central Bank encourages obliged entities to assess individual cases, rather than preclude specific groups that are not subject to sanctions.

There have also been issues related to the access of refugees and asylum seekers to minimum financial services and challenges related to the implementation of due diligence. Since the Minister of Justice has decided that protection shall be provided to refugees from Ukraine due to mass migration, issues of this kind could also arise in Iceland. This consists of a residence permit issued on humanitarian grounds, which is granted for one year at a time and includes, among other things, entitlement and access to certain services such as housing, subsistence support, social services, health care and access to the labour market. It has been pointed out that access to basic financial services can be a prerequisite for participation in modern society. The European Banking Authority (EBA) has previously discussed challenges related to this in its opinion from 2016 on financial exclusion in situations where displaced persons and asylum seekers are unable to present the documents required to carry out a traditional due diligence, and if that is the case the opinion of EBA should be considered.

Dual-use products

The Central Bank would also like to draw attention to the fact that it is prohibited to enter into agreements, or to fulfil other rights and obligations, which contravene the laws and regulations on which they are based, in accordance with Article 7 of Act no. 68/2023 on the implementation of international sanctions and Freezinf of Funds. This applies regardless of whether these rights and obligations were established before or after the entry into force of the relevant regulation, unless otherwise stated therein. This entails, among other things, a ban on acting as an intermediary in the fulfilment of such rights or on participating in the fulfilment of the rights and obligations of those on sanction lists.

The restrictive measures that have been implemented in Iceland towards Russia include, inter alia, a ban on trade and services related to aviation and the space industry, including maintenance and repairs. Since a large part of Russia's aircraft fleet is manufactured in the EU, United States and Canada, it is possible that payments for services related to them go through Icelandic financial institutions. [1]

The aforementioned restrictive measures also prohibit trade in high-tech products that may strengthen Russia's military power and related services (see regulation (EU) 2022/328). Thus, it is prohibited to trade in any products that can have a dual use and could therefore be used in warfare and related services, cf. Article 2 of Regulation (EU) 2022/328. There is also a trade embargo on other goods which are listed in Annex VII to the regulation.

Since there are many types of goods, it cannot be ruled out that payments for transactions of this kind take place in Iceland. It may be possible to fulfil existing obligations. In those cases, it is specifically stipulated in the individual regulations. It is therefore important to evaluate each individual case.

In light of all of the above, it is clear that obliged entities need to be alert to whether they are enabling their customers to fulfil contracts or other rights and obligations that violate sanctions. This may entail a breach of the law which is punishable by fines or imprisonment of up to four years. If an offence is committed through gross negligence, it is punishable by fines or imprisonment of up to one year.

Finally, the Central Bank draws attention to the fact that The Ministry for Foreign Affairs has created a website where it is possible to access summarised information relating to the implementation of restrictive measures in Iceland due to Russia's military operations in Ukraine.

[1] Sanctions due to Russia's military actions in Ukraine

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