Author: Anastasia Holovatyuk, Lawyer at F&P
In the context of martial law and the ongoing armed aggression of the Russian Federation against Ukraine, the sanctions regime has become one of the key instruments of international and national law. For Ukrainian businesses, compliance with sanctions legislation has ceased to be a formality and has become a mandatory element of due diligence. Sanctions screening of counterparties is now a component of basic compliance and a tool for managing legal and financial risks.
Insufficient or formal due diligence of counterparties may result in financial sanctions, asset freezes, termination of relations with banks, loss of access to international markets, and in some cases, criminal consequences for officials. That is why businesses need to have a clearly defined minimum standard of due diligence and properly record the decisions made.
The importance of sanctions screening for Ukrainian business
Sanctions screening involves checking counterparties, their beneficial owners and related parties for inclusion in sanctions lists or other restrictive measures. For Ukrainian companies, this is not only a matter of compliance with Ukrainian legislation, but also compliance with the sanctions regimes of the European Union, the United States of America and other jurisdictions with which they do business.
Recent practice shows that even an indirect connection with a sanctioned person may be grounds for a bank to refuse to provide services, block payments or terminate contracts with foreign partners. In the absence of a documented audit, it is difficult for a business to prove the good faith of its actions.
Legal and business effects of the implementation of sanctions screening
A systematic sanctions screening allows a company to reduce the likelihood of violating sanctions legislation and demonstrate due diligence in the event of inspections or disputes. For international partners and financial institutions, this is a signal of a mature level of corporate governance and risk control. In practical terms, this affects access to finance, participation in international projects, and the sustainability of the business model.
Minimum standard of sanctions checks
The minimum standard for sanctions screening should be based on a risk-based approach, where the depth of the check depends on the risk level of a particular counterparty. At the same time, even for low-risk transactions, a basic level of control should be ensured.
This standard usually includes:
- Identification of the counterparty, its full legal name, registration data, location, and ultimate beneficial owners and managers.
- Checks against current sanctions lists, including the sanctions lists of Ukraine, the European Union, the US OFAC and, if necessary, other international lists.
- Analyzing the results of the check, taking into account possible false matches, similarities in names, transliteration, and corporate structures.
- Formation of a conclusion on the admissibility or inadmissibility of cooperation with the relevant counterparty.
- Regular review and re-verification of counterparties in the course of long-term contractual relations.
For certain sectors of the economy, such as financial, energy, and export-oriented businesses, such a standard is actually mandatory due to the requirements of banks and regulators.
Fixing decisions as a key element of protection
The existence of an audit without proper recording of its results does not ensure business protection. In the event of an audit or a dispute, it is not only the fact of screening that is crucial, but also the ability to prove how the decision was made and on the basis of what data.
In practice, this means a necessity:
- approval of the internal sanctions compliance policy or counterparty verification procedure;
- documenting each audit, including the date, sources used, results, and responsible person;
- recording the rationale for the decision to start or continue cooperation, especially in cases of increased risk;
- retaining relevant materials for a period sufficient to allow for internal or external audits;
- periodic review of procedures and training of employees involved in the conclusion of contracts.
The use of automated screening solutions and centralized information storage greatly simplifies these tasks and reduces the risk of human error.
Practical recommendations for business
Companies should start by assessing their own sanctions risks, taking into account the geography of their operations, the structure of clients and counterparties. On this basis, they should implement a proportionate verification system, integrate sanctions clauses into contractual documentation, and ensure regular monitoring of changes in sanctions legislation.
Involvement of lawyers or compliance specialists at the stage of building the system allows you to avoid a formal approach and create a mechanism that actually works in operations.
Sanctions screening as an element of sustainable development
Sanctions compliance should not be perceived as a restriction for business. In Ukrainian realities, it is a tool for preserving business, protecting assets and maintaining trust on the part of partners and financial institutions. The integration of sanctions inspections into the corporate governance system is in line with both Ukraine’s national interests and generally accepted international standards for doing business in the context of heightened geopolitical risks.
