The European Union, United States and many other countries have imposed sweeping sanctions on Russia in response to its attack on Ukraine.

But how exactly do sanctions work here, and how are they enforced?

Firstly, what is a sanction?

A sanction is essentially a restriction on someone’s (or something’s) ability to trade, or to access a market.

They can be levied on individuals, organisations or entire countries – and can take the shape of anything from a travel ban to a block on the sale or purchase of certain products and services.

How does that happen in practice?

Irish sanctions are brought in through Statutory Instruments, the details of which can easily be found online. However they generally refer back to regulations published at a European Union, or even United Nations level.

It is here that Irish companies will be able to find a list of the people, companies and areas impacted by new sanctions – and it is up to them to ensure they are compliant.

For financial firms, that may mean freezing the assets of certain clients – or blocking transactions to or from a sanctioned entity.

Anti-money laundering and 'Know Your Customer’ laws make this process easier for most companies, as it requires them to hold detailed information on their customers, clients and investors – as well as the transactions they would be involved in.

And, as sanctions have been a feature of the financial landscape for many years, most sizable firms are likely to have automated systems in place to flag offending accounts; once the new sanctions targets are added to their lists.

There is likely to be an element of manual work required too, though, as companies will also need to check for subsidiaries, holding companies or other investment vehicles that might be connected to a specific sanction targets.

Companies will also have to decide how they account for anything that is impacted by sanctions – perhaps writing down the value of an asset that has had to be frozen.

Outside of finance, sanctions generally take the form of a ban on the trade of certain products - for example, raw materials, semiconductors or aircraft. However sanctions can also cover services, like the repair of equipment or training.

For companies buying and selling with Russia, checking compliance is likely to be relatively straight-forward.

However, as sanctions are often imposed on individuals – some of whom may be based in other countries - they will also have to cross-check sanctions lists against their own accounts and clients.

And the sanctions orders also cover the assisting of a prohibited trade, or trade with a "third country" – meaning companies will have to look beyond their direct dealings to ensure they are compliant.

How big are the financial and trade links between Ireland and Russia?

Relatively small – but by no means insignificant.

Data from the Irish Central Bank this week revealed that €37.1 billion worth of Russian-issued assets were held by Special Purpose Entities in Ireland. Most of these are loans issued to Russian companies.

Special Purpose Entities, or Special Purpose Vehicles (SPVs), can exist for a number of reasons; for example to hold assets as collateral, to take advantage of certain tax arrangements or to provide liquidity to a firm.

According to the Central Bank, the number and value of Russian-backed SPVs in Ireland has fallen since 2016 – in part due to the sanctions imposed after Russia’s invasion of the Crimea region of Ukraine.

Aside from SPVs, Irish investment funds held €11.5 billion of Russian assets at the end of last year. That is a sizable sum of money, though it does only represent 0.3% of the total assets held by investment funds here.

Meanwhile, Irish-authorised banks had a €1.7 billion exposure to assets connected to Russian residents. Most of this was held by Irish banks with operations here, and it represents just 0.1% of the financial assets and liabilities held by banks in Ireland.

In the broader economy, trade between Ireland and Russia is also relatively limited.

According to the Central Statistics Office, Ireland exported €627m worth of goods to Russia last year – representing 0.4% of all exports in 2021.

At the same time, €598m worth of Russian goods were imported, or 0.6% of the total for the year.

According to the most recent CSO data available, €3.24 billion worth of Irish services were sold to Russia in 2020. That is 1.3% of the country’s total in the year.

Meanwhile, €360m worth of Russian services were bought here – or 0.1% of the total in the year.

Of course not all of this will be impacted by the sanctions.

Who makes sure sanctions are adhered to?

In Ireland, there are three bodies that oversee the implementation of sanctions.

The Department of Foreign Affairs, the Department of Enterprise, Trade and Employment and – in terms of financial sanctions – the Central Bank.

While the onus is on companies and individuals to ensure their compliance, the Department of Enterprise, Trade and Employment says it proactively communicates with companies to inform them of any changes to regulations – such as new sanctions.

It says this may take the form of updates over email or social media, as well as more targeted measures including information sessions and webinars.

How do they make sure companies are following the rules?

The Department of Enterprise says it works closely with Revenue to monitor export and import declarations to ensure the trade-side of any sanctions are adhered to.

It also conducts risk assessments on trade to try to identify potential breaches to sanctions; this might help to spot cases where intermediaries or third parties are used to circumvent the rules. Meanwhile some of its staff are also tasked with working with traders to ensure they are following trade rules.

In finance, regulators would already have regular engagement with operators here to ensure ongoing compliance with rules – and that would include sanctions orders.

There is also an obligation on those working in finance to report any potential breaches that they may come across – be it within their own company or another.

What happens if firms don’t comply?

There are potential penalties for anyone found to be in breach of EU regulations – which would include sanctions decisions.

The Statutory Instruments that makes these regulations law in Ireland say that, on conviction of a breach, a person could face a ‘Class A’ fine (which is up to €5,000) and/or one year in prison.

If someone is indicted for a breach, they could be fined up to €500,000 – and potentially face as much as three years in prison.

But there could be consequences beyond that.

Those in the industry say the reputational damage that would come from a firm breaching sanctions could see it lose business elsewhere, as clients might seek to distance themselves from a company that was found to be working with black-listed entities.

At the extreme end there is even the potential for their entire business here to be undermined.

Financial firms could face having their Central Bank licenses revoked – while the Department of Enterprise can also remove a company’s licence to trade abroad.