Euro SIFMANet STHLM Report

In early September 2023, the Centre for Financial Crime and Security Studies (CFCS) at RUSI, with the support of the Stockholm Centre for Eastern European Studies (SCEEUS), hosted a roundtable in Stockholm. Held under the Chatham House Rule, the roundtable, along with a series of one-to-one meetings, discussed the state of sanctions implementation in Sweden. The gatherings included representatives from national authorities with sanctions-related competences. These included, among others, the office of the Swedish sanctions coordinator, Ministry of Foreign Affairs (MFA), Ministry of Finance, Customs, the Inspectorate of Strategic Products (ISP) and the National Board of Trade. This event is part of the in-country engagements conducted by the CFCS-led European Sanctions and Illicit Finance Monitoring and Analysis Network (SIFMANet), supported by the National Endowment for Democracy.

The discussion opened with the introduction of two key facts: 97% of the Swedish population supports sanctions; and trade with Russia prior to the full-scale invasion of Ukraine represented less than 2% of Swedish trade. These figures exemplify the commitment of the country to maintain an effective sanctions regime that affects an already-limited exposure to Russia. In fact, participants pointed out that prior to February 2022, the Swedish economy was already decoupling from Russia, aiming to minimise its most exposed connection: oil dependency.

Once the new set of EU sanctions was imposed on Russia, the rush to implement it at a national level was confronted by the complexity of the regime’s “unprecedented” scale. This new context sent the Swedish system into shock and the capacity of authorities to respond and provide support to the relevant operators was overwhelmed. Furthermore, the Swedish system was challenged by the additional resource pressures resulting from its presidency of the Council of the EU in the first half of 2023. Under this landscape, Swedish authorities identified a series of deficiencies that limited their capability to implement sanctions more effectively. These are described further below.

The Swedish Sanctions Framework

The Swedish Act on Certain International Sanctions (1996:95) contains the country’s regulation for the implementation of EU and UN sanctions regimes. As participating authorities pointed out, Sweden does not have its own national sanctions policy.

Within the country’s framework, the MFA serves as the coordinating body and distributes responsibilities among the relevant agencies but possesses limited powers. Participants highlighted the nature of the Swedish government as a reason for the particular relationship between ministries and agencies. In Sweden, while agencies sit within specific ministries, “ministerial rule” over agencies is prohibited. This particular characteristic of Sweden means that a minister does not have the power to intervene directly in an agency’s day-to-day operations or instruct agencies on individual matters.

With responsibilities distributed among different authorities and a lack of real coordination power overseeing implementation, the country’s architecture of competent authorities was unanimously labelled as “fragmented”. Each authority recognised its limited competences, the extent of which is still unclear and only now being assessed. Several participants agreed that the lack of a centralised sanctions authority hinders the effective implementation of sanctions in Sweden. Representatives from the MFA noted that while this framework might have worked in the past, it is no longer fitting for the demands of the current sanctions regime against Russia. A new sanctions coordinator was appointed in August 2023 that sits within the MFA, but the lack of executive capabilities persists.

Furthermore, the complexities of EU sanctions regulations and the guidance provided present great difficulties for national operators. The Financial Supervisory Authority (FSA) noted that the technical complexities and varying interpretation created confusion about the practical application of sanctions. However, the MFA explained it does not have competency to interpret sanctions and struggles to clarify the rules to other authorities and businesses, limiting itself to the wording of the European Commission guidance and identifying the authority that will assume a specific competency.

Participants added that fragmentation does not only occur among authorities, but also within the MFA itself. While the sanctions coordinator does sit with the MFA sanctions teams, most sanctions are managed by different geographical departments. This means that the MFA as a whole does not have the full picture of the sanctions-related challenges that Sweden faces. The limited number of staff dedicated to sanctions at the ministry also hinders its effectiveness to manage this dual task of policy and implementation.

The national framework thus faces real weaknesses to implement sanctions, but authorities added that these are reinforced by the imbalances among EU member states. The different interpretation of sanctions rules at the domestic level is heightened when contrasted with the varying interpretations by authorities in other national jurisdictions within the EU. This lack of harmonisation has been identified in previous engagements of SIFMANet in other European capitals and continues to pose a major challenge to the effectiveness of the EU sanctions regime.

Implementing Sanctions and Export Controls

Despite the aforementioned structural complications, Sweden benefits from a robust and experienced financial system on which it relies to implement sanctions, as well as well-developed export controls. Before addressing the functionality of these, Swedish authorities agreed that the most relevant incentive in the country to comply with sanctions is the risk of reputational damage. With high domestic levels of support for Ukraine, the reputational risk of continuing trade with Russia has led to increasing financial and trade disengagement since 2014. Swedish businesses voluntarily decided to sever ties with Russia and impose on themselves high compliance standards – including overcompliance in many cases.

Beyond these voluntary measures, Swedish banks are obliged to conduct financial screening for direct and indirect trade with sanctioned entities. Representatives from the FSA described banks and their financial infrastructure as strong and experienced in regard to sanctions. However, the financial supervisor explained that other sectors – such as the insurance sector – faced greater difficulties, struggling with sanctions screening, identifying assets and lacking a governance body.

While the FSA is charged with supervision, the authority does not investigate individual sanctions breaches and instead aims to ensure overall compliance capabilities in the sector. In 2021, the FSA conducted an inspection of one of Sweden’s largest banks from a governance perspective, checking the existence of a governance structure and its risk assessment. The supervisor expressed its satisfaction with the lack of pushback from obliged entities, who share the mission of sanctions and agree on the importance of their effective implementation. In this context, the FSA has exchanged daily updates and dialogues with businesses. However, the FSA does not have a self-reporting mechanism and declared that if a business detects a client evading or breaching sanctions, it is not clear to whom it should report the incident. A reason for this is that, currently, anti-money laundering and sanctions are separate areas, and the agency has the mandate only for the former.

Regarding export controls, Sweden has a long-running system to supervise military and dual-use goods exports. The ISP is the agency in charge of monitoring compliance and licensing. ISP representatives stated that the producers of these goods have ample experience with the controls in place, as well as the geopolitics involved in this sector. However, representatives from the agency highlighted that with the expansion of the sanctions regime against Russia, export controls now affect companies with no prior experience of these procedures and with which the agency has not traditionally worked. The ISP requires a valid reason from these entities to maintain their activity in Russia in order to grant them a licence, but their lack of experience overwhelmed the ISP’s capabilities, which had to introduce them into the basic legal framework. To facilitate this process, the ISP makes use of its standard outreach programme, which has now expanded its content and counts with a mechanism to self-report breaches.

Furthermore, for those goods that do not fall within the purview of the ISP, the mandate lies with the National Board of Trade. This agency grants exemptions for those who meet the necessary requirements but has no mandate on enforcement. Representatives from both agencies also noted a fragmentation in the Swedish context for cases where the same exporting entity requires an exemption from both the ISP and National Board of Trade, which as independent agencies need to coordinate with each other.

Participants also emphasised the fact that many businesses operating in Sweden are companies with international presence. Their cross-border operations make these entities subject to the different interpretation of EU sanctions by different member states. Again, this presents a major challenge for businesses aiming to comply with sanctions and for authorities seeking to support their efforts.

Investigations into Sanctions Violations

Sweden benefits from high levels of compliance in a domestic landscape favourable to sanctions. However, if sanctions violations were to take place, Swedish authorities do not have the capacity to build an adequate response. Participating law enforcement officials explained that sanctions violations are criminalised in Sweden and can be prosecuted with penalties ranging from fines to imprisonment. However, the current legislation does not criminalise attempts to violate sanctions. This will be remedied by the upcoming EU directive to criminalise sanctions violations.

In the meantime, Swedish law enforcement requires someone to report a sanctions breach to initiate an investigation but has received very few tips in the past year. As a consequence, according to authorities there are no ongoing criminal investigations, which reflects a low risk of violations being detected. Representatives from Customs noted that the agency has the mandate to investigate and did initiate a process against a company. The case reached the prosecution phase, but there was ultimately not enough evidence for a conviction. Customs expressly pointed to the lack of a formal end-user documentation to prove a crime throughout the supply chain.

Authorities again highlighted that while they each have a piece of the puzzle, they suffer from the lack of a centralised authority to see the full picture.

This fragmented framework also impacts asset confiscation in the country. Swedish authorities do not have the power to freeze assets just because an individual or an entity is designated. They require a criminal investigation, and no authority has been tasked with going after the assets. In a visual example of this, participants mentioned that in the case of yachts, it is the duty of the boat club where the yacht is docked to prevent its departure.

Tackling Circumvention

Sweden benefits from the reputational pressures noted above to limit its exposure to sanctions violations. However, participating authorities emphasised that these risks are not only linked to direct connections with Russia, but also indirect exports and transactions through complex corporate schemes or the involvement of third-party jurisdictions. At present, circumvention is one of the main concerns in relation to sanctions in the country.

Following increasing media reporting of Swedish trade flows to third countries suspected of facilitating circumvention, supported by reporting from the security authorities, Sweden is in the process of establishing a task force to prevent this practice. The risk of circumvention has led Swedish banks to block activities and transactions beyond what is mandated by sanctions, engaging in overcompliance. Non-financial businesses are also wary of their trade partners, but authorities understand that their due diligence capacities have a limit.

In this regard, authorities note that there is not much a Swedish business can do beyond its due diligence duties and demanding that a third-party operator declare in writing that the products it is purchasing will not be sent to Russia. Participants added that large companies – especially those whose trade involves US components – might have the additional incentive of fearing being sanctioned by the US Office of Foreign Assets Control, but this will not necessarily be the case for small or medium-sized enterprises. In the case of military or dual-use goods, the ISP does have the power to stop a transaction and report to the prosecutor.

To tackle circumvention, participants from the National Board of Trade stated that there is sufficient knowledge that it is taking place through Sweden – a fact that is likely to be underlined in a forthcoming report it is due to publish – and sufficient resources and investigation powers should be allocated to tackle this practice. Still, the MFA noted that to achieve such increase in resources, authorities need actual evidence of circumvention – a major challenge given the deficiencies described above. Representatives from the MFA argued that among the reasons for this weakness to counter circumvention are insufficient information sharing among authorities and the lack of a coordination body to identify the real challenges.

Although not directly related to sanctions, participants added that certain measures currently underway could be helpful for the more effective implementation of sanctions, such as foreign direct investment screening or increased export controls. A participant highlighted that recognising that these issues are interconnected is key to developing a comprehensive economic security strategy in Sweden.

Conclusion

Among the member states visited by SIFMANet, Sweden stands out as one of the countries most committed to the effective implementation of sanctions across the public and private sectors. Despite the efforts of authorities and businesses to comply even beyond what is mandated by EU regulations, the complexities of the sanctions regime and the ever-changing risks posed by Russia’s circumvention operations pose a major challenge to the success of sanctions.

The deterrence of reputational risks attached to persisting trade flows with Russia are a beneficial starting point for Sweden’s sanctions efforts, but much must be improved in the country’s implementation framework. Most importantly, to mitigate the fragmentation of sanctions-related responsibilities, coordination must be improved. As some observed, like Sweden itself, its sanctions response represents “an archipelago” that needs unifying. The recently appointed sanctions coordinator must play an enhanced role to cover the gaps in the MFA’s capabilities in this regard. Participants were also largely sympathetic to the idea of a centralised advice provider to alleviate the MFA’s burden and its limited guidance powers. This centralised role could be assumed by an institution such as Business Sweden.

Investigative powers into sanctions violations and circumvention are also lacking in Sweden. The upcoming EU directive criminalising sanctions violations will improve enforcement, but authorities must ensure that they are fit to implement the new rules. Additionally, information sharing must be promoted at a domestic and international level. The lack of harmonisation across member states has been repeatedly observed by this project and continued efforts should be dedicated to overcome the challenges posed by this weakness of the EU sanctions regime.

Gonzalo Saiz is a Research Analyst at the Centre for Financial Crime & Security Studies at RUSI, focusing on sanctions and counter threat finance. He is part of Project CRAAFT (Collaboration, Research and Analysis Against Financing of Terrorism) and Euro SIFMANet (European Sanctions and Illicit Finance Monitoring and Analysis Network).