A recent judgement by the Netherlands Institute for Human Rights found that, due to the current sanctions legislation, a bank indirectly discriminates in carrying out its obligations. The sanctions rules designed to prevent money from getting into the wrong hands appear in practice to impose disproportionate burdens on individuals with non-Dutch names. This causes an imbalance between effective sanctions and avoiding unintended discrimination. Emanuel van Praag, Professor of Financial Technology & Law at Erasmus School of Law, appeared in the Financieele Dagblad and a RADAR broadcast on this subject. “The number of people you end up harassing is too high compared to how many you catch.”
Van Praag explained that the current sanctions lists consist mainly of people from countries such as Iran and Afghanistan. As a result, people with similar names are often subjected to additional checks. The professor indicates that this system causes indirect discrimination, as persons with non-Dutch names are more likely to come forward in these checks. "The bank thus indirectly discriminates based on origin", the Netherlands Institute for Human Rights (hereafter: the Institute) said, adding that people of foreign origin are more often subjected to unjustified extra checks.
The function of the sanctions law
The sanctions rules are designed to prevent financial resources from getting into the hands of individuals on sanctions lists, often because of their involvement in human rights violations or supporting undemocratic regimes. Blocking bank accounts or stopping transactions can have far-reaching consequences for those affected. In extreme cases, it can lead to not being able to pay bills and not being able to withdraw cash.
According to Van Praag, the sanctions law consists of a dual system. On the one hand, banks check whether their own customers are on the sanctions list. This is done in an automated way where a customer's name is compared with the sanctions list. If there is a match, it is manually investigated whether it is the same person by comparing dates of birth, for example. This process is a little burdensome for the customer as it takes place behind the scenes.
On the other hand, banks must also check payments to non-customers. This means that if a customer transfers money to someone, such as a friend abroad, the name of the beneficiary is compared with the sanctions list. If the name matches, the payment may be temporarily stopped, and further investigation will follow. These checks are especially annoying for people with non-Dutch names, as Van Praag stresses: "If there is a hit, the payment is stopped, and manual investigation follows. This process is incredibly annoying and stigmatising for those involved."
Risk appetite and proportionality
The problem, says Van Praag, lies in banks' low 'risk appetite'. This term refers to the risk appetite of financial institutions: to what extent do they accept the chance of a faulty transaction slipping through the system? Banks have a very low-risk appetite, meaning that even the slightest chance of sanctions violation must be investigated. Van Praag explains that this leads to an unnecessary burden on customers, especially in cases where the risk of a sanction violation is extremely low.
In his plea for change, Van Praag argues that legislators should increase the risk appetite. Banks would then only have to investigate transactions with a real risk of a breach of sanction rules. In the specific case, the Institute assessed a transfer of only €100 within the Netherlands was subject to sanction scrutiny, even though both accounts were in the same person's name. Van Praag called this disproportionate and not in line with the purpose of the sanctions legislation.
Discrimination and the sanctions act
The Institute's judgement highlights the adverse impact of the current sanctions legislation on people from non-Dutch backgrounds. Although banks strictly follow the law, the system leads to indirect discrimination. This is because names on the sanctions list tend to come from certain parts of the world, subjecting individuals with similar names to disproportionate scrutiny.
Van Praag argues that the discrimination is not directly based on origin but that the consequences are disproportionate for specific groups. "The extent to which you harass people is no longer proportionate to the goal of preventing sanction violators from getting money."
The way forward: a more proportionate approach
According to Van Praag, there is an urgent need to adjust sanctions rules to ensure a more proportionate approach. He argues that the legislator should increase the risk appetite by requiring banks to check less rigidly. This would mean that only transactions with a real risk of sanction violation would be investigated more closely, making customers with foreign names less likely to be unfairly harassed.
The current legislation creates an environment where banks are forced to respond disproportionately to transactions for fear of sanctions by regulators such as De Nederlandsche Bank. This leads to a system where payments between European banks and even small amounts are subject to the same strict controls as large, risky transactions.
Van Praag, therefore, calls for a reform of sanctions policy. The focus should shift to checking transactions with real risk to preserve the effectiveness of sanctions legislation and avoid unnecessary burdens on customers.