The use of economic sanctions targeting individuals, companies and state actors continues to be a powerful tool in a world of escalating geopolitical tensions and democratic disruptions. As the United States, United Kingdom and China have imposed their own economic sanctions, a recent report from Federal Parliament into Australian sanctions targeting human rights and significant corruption recommended the enactment of a standalone targeted Magnitsky sanctions regime. This follows a Parliamentary Inquiry into Australia’s use of targeted sanctions to address human rights abuses, which commenced in December 2019.
The terms of reference for the Inquiry centred on the adoption of a Magnitsky-style program under the Autonomous Sanctions Act 2011 (Cth) and Autonomous Sanctions Regulations 2011 (Cth). These specific sanctions historically arose out of the case of Sergei Magnitsky and the subsequent enactment of these thematic sanctions programs across the United States, United Kingdom and European Union under his name. The underlying purpose of these sanctions measures is to prevent and respond to gross human rights abuse or acts of significant corruption.
With a suggested draft bill accompanying the tabled report, companies, boards and senior management, undertaking business in Australia will need to consider the impact and effect of a new sanctions regime on their existing operations.
What conduct is targeted?
Recommendation 3 of the Report suggests sanctioning “Magnitsky Conduct” and is aimed at human rights violations and significant corruption. Although there are no specific sectors or industries targeted, there are certain sectors that would have greater exposure to Magnitksy Conduct.
The proposed designation categories are deliberately broad, targeting persons responsible for engaging, facilitating, inciting, acquiescing and concealing evidence of a human rights violation or significant corruption. Persons and entities involved in providing financial services, assets or technology, may be subject to designation. Designating foreign public officials however, may prove to be an immediate concern, given the potential to frustrate bilateral relations between Australia and the foreign country where the designated official is located. Exemptions may need to be considered where Australian Commonwealth Government and state owned entities are interacting with a foreign government official subject to Magnitsky sanctions.
Financial services are likely to be one area impacted by the proposed Magnitsky laws as minimising access to the Australian financial system is one of the best ways to limit the designated individual’s ability to conduct commercial dealings and use of assets they may hold within Australia. This extends the legislative reach beyond the existing law, which is more focussed on the proceeds of crime, money laundering and modern slavery. Aligning sanctions and anti-money laundering oversight is becoming increasingly important, particularly with the rise of virtual currencies providing a level of anonymity as to source of funds and wealth.
Technology and communications sectors are also at risk given the ease with which money can be transferred from higher risk jurisdictions, with historically weaker democratic institutions and well-documented human rights and anti-corruption practices, to Australia. Encrypted communication platforms are increasingly being used to communicate the transfer of funds from higher risk jurisdictions to more economically stable countries such as Australia, a jurisdiction which could be exploited to launder or otherwise safeguard tainted assets.
Who is targeted?
A key policy objective in the report and draft bill is to provide a legal mechanism to deter serious violations of human rights and significant corruption committed by foreign persons outside of Australia. Recommendation 29 of the Report proposes to achieve this through an asset freezing and travel ban, targeting designated persons and their associates committing Magnitsky Conduct.
Similar to other sanctions laws administered by the Australian Sanctions Office in the Department of Foreign Affairs and Trade, the Minster for Foreign Affairs and Trade (Minister) will have the power to designate, vary or revoke a person’s designation status. Third party individuals, organisations or associations affected by alleged Magnitsky Conduct will also be able to request the Minister to designate a person under the scheme. In doing so, asset freezes will prohibit the dealing of assets owned, held or controlled by a designated person including making funds or assets available to them or for their benefit.
Undertaking regular risk assessments and ongoing monitoring of dealings with foreign governments, state owned enterprises and private companies at risk of exploitation are just some of the measures necessary to prevent serious penalties, loss of business and reputational damage under the proposed new scheme.
How will this act as a deterrent?
Currently, the AML/CTF framework in Australia does not require sanctions supervision or screening requirements. However, the AML/CTF regulator the Australian Transaction Reports and Analysis Centre (AUSTRAC) has incorporated guidance recommending that regulated entities consider risk assessments and due diligence processes for high risk jurisdictions and the potential involvement with sanctioned persons or entities. Unique to the draft bill is the proposed reorganisation of sanctions supervision responsibilities to AUSTRAC. This is to provide an alternative system of tracking, reporting and enforcing of prohibited transfers of assets belonging to designated persons and their associates. The draft bill also proposes several amendments to the AML/CTF Act to give effect to the scheme.
Regulated entities in Australia would be required to monitor their customers by identifying, verifying and lodging suspicious matter reports of funds or assets available to designated persons or their associates. AUSTRAC would be able to request a regulated entity, on written notice, to provide additional information or documents relevant to a suspicious matter, threshold transaction or international funds transfer instruction reporting obligation. At the outset, companies need to know if they are regulated under Australia’s AML/CTF laws. Where they are regulated, companies should review their products and services as well as their delivery channels for potential exploitation.
What penalties and fines could be imposed?
Companies operating both in Australia and internationally should consider the strict liability offences that exist for corporations under Australia’s sanctions regime. Penalties for companies can amount to $2.22 million or three times the value of the transaction for breaching a sanctions offence or sanctions permit. Directors and senior management, in their personal capacity, need to consider criminal penalties including 10 years imprisonment and fines amounting to $555,000. The civil penalties for directors and companies under the Corporations Act may also apply.