Sanctions continue to be a growing challenge globally for AML compliance functions, with geopolitical events raising the profile of sanctions in the public eye and putting pressure on sanction screening within financial institutions and corporations. Indeed, in the several months since the invasion of Ukraine, much of the aggressor’s financial system has been hit by sanctions, with the UK sanctioning more than 500 individuals, entities and their subsidiaries(1).
What are sanctions?
In their simplest form, sanctions are political trade tools put in place against targeted countries, individuals or entities with the goal to maintain or restore peace and security. Their purpose is to change the behaviour of the targeted country/individual/entity’s regime or direction with the aim to improve outcomes or stop certain activities.
A sanction can be explicit or implicit. Explicit sanctions detail the specific names of a country/individual/entity. Implicit sanctions are more narrative in nature and can be harder to manage, such as statements on a sanctions programme or a sanctioned entity without any specific names to screen against.
There are several types of sanctions:
- Economic sanctions – typically a ban on trade, possibly limited to certain sectors or with certain exceptions (such as food and medicine)
- Financial sanctions – prohibiting the transfer of funds and freezing of assets
- Diplomatic sanctions – the reduction or removal of diplomatic ties, such as embassies
- Immigration sanctions, known as travel bans
- Military sanctions – military intervention
- Sport sanctions – preventing one country’s people and teams from competing in international events
- Sanctions on the environment – since the declaration of the United Nations Conference on the Human Environment, international environmental protection efforts have been increasing gradually.
For AML programmes within financial services, in the current climate it is particularly important to monitor economic and financial sanctions to impede various criminal activities such as money launderers, terrorists, narcotics trafficking, arms dealers, and human rights violators.
What are sanction lists?
A sanction list is a collection of individuals, groups and entities that are the subject of a sanction. As there are many issuing sanctions bodies, the nature of the lists vary, as can their complexity.
For example, a sanctions list from one body may differ in content to another, where one is more detailed including the name of the individual, recent locations, aliases and other ancillary data. Also, some lists are consolidated lists, such as that published by the European Union for EU related financial sanctions, and others are highly targeted lists such as the Interpol list for international criminals.
Once on a sanctions list, it can be difficult to be removed. In-depth due diligence by the issuing body must be undertaken to determine whether the person or entity in question no longer poses the risk or threat they were sanctioned for.
Who issues and enforces sanctions?
Multiple issuing bodies exist around the world, each with their own independent list. They are primarily departments of government who impose sanctions via certain acts/regulations, as well as law enforcement bodies, such as Interpol.
For example, in the UK, HM Treasury implements and enforces financial sanctions through its Office of Financial Sanctions Implementation (OFSI). In Europe sanctions are imposed by the UN Security Council (UNSC), the European Union (EU) and individual states, and in the USA they are imposed by the Office of Foreign Assets Control (OFAC) – a division of the Department of Treasury for economic sanctions.
Many countries follow the UNSC sanctions regimes, and maintain their own sanctions programmes too. They do this as a matter of international law and policy setting.
What does it mean to comply with economic and financial sanctions?
For financial institutions and corporations, having a sanction screening programme and solution makes it possible to check whether a customer is named on a sanctions list. The lookup and alert process must also check for affiliates of those who are listed, and may include self-created black or watch lists, adding to the screening process.
Sanction screenings play a critical role in detecting and preventing transactions with high-risk individuals/entities and in adhering to the multitude of regulations for money laundering, fair trade, foreign policy and national security. Name Screening should be part of the due diligence carried out on customers and transactions upon on-boarding, inbound/outbound activity screening, and by every player within the supply chain. This way, sanctions screening can play an important role in preventing the criminal, reputational, and commercial damage caused by noncompliance, and the association with illicit activities (such as money laundering, terrorist financing etc.)
Failing to identify such entities (or customers) and activity can have consequences – reputational damage, regulatory fines, and predicating criminal or illicit funds and activity.
What makes sanctions screening challenging?
The sanctions landscape is constantly changing – in fact it changes daily. This adds to the complexity and dynamics of effective screening. The three biggest challenges today include:
- Complexity and frequency – sanctions have become more complex over time in terms of the information they include. Recent world events are only exacerbating the frequency of changes, so maintaining up-to-date lists for screening against can be a challenge in today’s environment.
- Legacy systems – systems that are not properly optimized for timely, effective and efficient screening often struggle to keep up with alert management; causing delays and allowing unfavourable activity to move through the traditional banking system. By contrast, where systems are able to make the most of technological innovations, such as the latest in automation technology, risks can be quickly picked up and mitigated.
- Managing false positives – false positives occur for many reasons. With sanctions screening they can often occur when systems pick up on words or names used in multiple contexts – for example if the name of a sanctioned individual is also a street name that appears in an address line, or a common name used by multiple customers. The textual vs contextual play can be tricky and one that a well-tuned AML screening solution can help to solve.
As the complex and dynamic sanctions landscape continues to evolve, having an effective sanctions screening programme in place has never been more important. Institutions need to navigate these challenges in order to mitigate the risk of breaching regulations and meeting compliance sanctions obligations.
Find out more about Sensa-NetReveal’s sanctions screening capabilities
As sanctions risks become ever more complex for the financial community to navigate, Charmian Simmons, our Financial Crime and Compliance Expert, revisits the foundations that make up sanctions in her latest blog
