What are Sanctions?
Sanctions are trade restrictions used to limit/restrict commerce and could be applied to nations, individuals, or businesses by governments or international organizations like the United Nations. These sanctions are often used to punish illegal actions such as financial or humanitarian crimes or terrorism. They may also be deployed in order to achieve political and diplomatic goals, e.g. sanctions were applied to South Africa during apartheid to push the country towards peaceful majority rule. These sanctions restrict companies and individuals from doing business with countries named on a sanctions list.
In the United States, sanctions are issued by an executive order signed by the President of OFAC (the Office of Foreign Asset Controls). These sanctions are then enforced by the US Department of Treasury. In the UK, the Treasury implements and enforces sanctions through the Office of Financial Sanctions Implementation (OFSI).
Economic sanctions may include:
- Trade embargoes restrict certain products or services from being delivered to another country, e.g. the recent EU embargo on Russian crude oil, and petroleum products and ban on shipping insurance for Russian oil;
- Issuing custom duty on imported products and imposing quotas on imports and exports;
- Issuing license or package regulations or standards for imports;
- Property bans on goods and finances;
- Asset seizures and travel bans.
Since 2001, there has been a move towards targeted sanctions as opposed to total embargoes in order to lessen the suffering of citizens within the designated country. Targeted sanctions target specific persons, entities, or groups as opposed to targeting a nation in its entirety.
What Are Embargoes?
Embargoes are commercial barriers that prevent trade or commerce with a single nation or group of countries in a specific way. Embargoes are powerful legislative restrictions that hope to elicit a specific outcome from the country on which they are imposed. Embargoes prohibit a country from dealing with another country for a certain sector, product, or even all items (e.g. not allowing any import or export from that country).
An import embargo prohibits persons or companies from importing goods from a specific nation, e.g. the embargo placed on Cuba by the United States. An export embargo prohibits the export of any items manufactured in one country to another, e.g. the embargo placed on Syria by the United States.
The distinction between sanctions and embargoes resides in partiality and full prohibition. Sanctions are applied to specific categories of commodities being traded in various ways, with deterrent factors, while embargoes prevent all items from being traded.
What is Sanctions Risk?
Companies or individuals who breach sanctions by trading with sanctioned individuals or nations face harsh penalties. Companies may face fines of up to multiple millions of USD or 50% of the estimated value of the breach, depending on which is the higher amount.
However, it is not easy to remain compliant for the following reasons:
- Sanction lists are constantly evolving. New entities are added or removed regularly. By March 2022, more than 5000 different targeted sanctions were imposed against Russia, and more than 1000 Russian citizens have been added to various sanctions lists.
- The nature of sanctions is complex, targeting very specific sectors and prohibiting specific activities which are more open to interpretation.
- Entities aren’t the only sanctions to be aware of. Customers who are not listed but have a relationship with a sanctioned entity may also present a risk.
- There are several sanctioning bodies active, each with its own sanctions lists, which may not align.
Why Sanctions Screening and Monitoring is Important
Sanctions are a compilation of individual sanctions applied to persons, countries, groups or companies, collated by governments or international bodies. In order to adhere to these sanctions, sanctions screening during the onboarding process (and continuous monitoring) is important for all organizations who want to comply with sanctions requirements and protect their businesses against risk.
Sanctions screening forms an important part of any AML compliance program and should be used as is appropriate according to each business’ risk level. Companies can reduce their sanctions risk exposure by:
- Regularly screening their Business Partners against continuously updated Sanctions Lists;
- Ensuring that their sanctions screening process is appropriate and adequate for the jurisdiction in which they operate;
- Ensuring that their data gathering and analysis tools are able to support the sanctions screening process quickly and with great precision.
Businesses have a duty to ensure that they strictly uphold sanctions as they are implemented. They must dedicate technology, expertise, and employee training to meet their obligations, If you need any help or more information for your Sanctions compliance process, feel free to contact us for advice or a demo of our Sanctions screening solution.