While for some, a “sanction list” is just a known term, for others, it’s a complex concept that is known to have influenced organizations, compliance regulations and national security over the years. Many industries deal with sanctions and are obliged to identify targets, both individuals and entities, that are under various sanctions regimes due to potential risks of being linked to terrorism, war crime or drug/weapons trafficking, human rights violations, and other serious threats.
The biggest challenge linked to sanctions is that the lists change, and a single misstep can lead to non-compliance, fines and reputational damage. However, sanctions are much more than standard regulatory compliance obligations. They are designed to achieve foreign policy and national security objectives. Screening sanctions lists is crucial to prevent involvement in transactions linked to corruption, bribery, or blackmail.
Understanding different sanctions regimes is important for compliance officers, business owners, and anyone who deals with global affairs, which we’ll discuss in a more detailed matter below.
The Definition of a Sanction List
A sanction list is a combination of countries, entities, and individuals that face penalties for engaging in illegal activities, such as terrorism, money laundering, weapons proliferation, and human trafficking. They are added to sanctions lists because of their threat to global security and peace. Being on such a list means you’re facing asset freezes, travel bans, trade embargoes, and financial prohibitions.
A sanctions list keeps detailed information about different offenders, including who they are and the activities from which they are restricted. Sanctions lists are regularly updated because of evolving geopolitical situations. Authorities like national governments issue them. The main issue from a financial institution’s perspective is that these lists can be a hassle because compliance teams must deal with various sanctions lists, resulting in them having to keep up with vast amounts of data.
For example, the HM Treasury oversees 26 sanctions lists in the UK. On a global level, the Office of Foreign Assets Control (OFAC) can list people who violate foreign policy as Specially Designated Nationals (SDNs). The status of the OFAC SDN list restricts the person from participating in the global marketplace, which, as a result, becomes a national and international warning.
Types of Sanctions
There are different sanction categories that help companies better understand how to respond to regulators’ requirements. For example, sanctions imposed by the United Nations are considered to be international. Some types of sanctions overlap and can be combined, such as how the UN, US and EU combined military, financial and economic sanctions.
In general, these are the key types of sanctions:
- Financial sanctions. This includes limiting market access, banning transactions or freezing assets in order to impact a country’s financial sector. For instance, the US has imposed financial sanctions on Iran.
- Economic sanctions. These penalties, such as travel bans, trade embargoes, or asset seizures, are imposed on a country, its officials, or its citizens.
- Military sanctions. Examples include restricting military aid or arms embargoes. Military sanctions are used in exceptional situations.
- Trade sanctions. The most common examples are embargoes (restrictions on export licensing) and non-tariff barriers (export and import bans). Like other sanction types, the goal is to disrupt a country’s economy. For example, the US imposed sanctions on North Korea.
- Diplomatic sanctions. Diplomatic sanctions target diplomatic relations by actions such as expelling diplomats. For example, how the Russian diplomats were expelled after the annexation of Crimea, as well as imposing measures such as visa restrictions on certain country’s officials who violate human rights.
Entities on sanctions lists that appear there due to financial crimes can harm the economy and are banned from conducting transactions in the country where they’re sanctioned.
Related: The Complete Sanctions Screening Guide
What is the Purpose of a Sanctions List?
Sanctions lists have two main goals — to compel or to deter — in order to prevent certain actions or change one’s behavior, targeting specific individuals or groups. These restrictions discourage behaviors like money laundering, terrorism, weapons proliferation, and human rights violations.
In simple words, a sanctions list aims to:
- Prevent companies and people from engaging with sanctioned entities. Doing business with such entities could be seen as supporting illegal behavior.
- Pressure sanctioned entities to stop their activities. This is done on purpose by publicly pressuring them and making it difficult for them to continue their illegal behavior.
Sanctions limit foreign financial institutions’ interactions with targeted parties by placing trade restrictions on them. Officials, including individuals and their family members, can be barred from traveling to sanctioned jurisdictions. Additionally, assets in sanctioned countries can be seized or frozen.
Sanctions are also used to handle conflicts in other countries and to encourage change in behavior. For example, the EU has imposed sanctions on Russia due to its war on Ukraine. Consequently, EU sanctions prevent Russian-flagged vessels from entering EU ports, among other sanctions.
Why Should Companies Care About Sanctions Lists?
Financial institutions and other regulated entities must carefully screen sanctions lists to ensure potential partners or customers aren’t linked to sanctions before doing business with them. This is a legal requirement, as sanctions screening is part of anti-money laundering (AML) compliance measures.
Financial institutions can search sanctions lists to determine if an entity is an individual or a company, what they are sanctioned for, and the restrictions they face. By checking these lists, companies can avoid links to criminal activity, which also helps law enforcement reduce illegal activities.
However, it’s worth noting that not all entities mentioned in sanctions lists are directly linked to some sort of criminal behavior. There are entities that are on sanctions lists because they acted on behalf of others. All businesses should care about sanctions and related compliance requirements because, otherwise, negligence can lead to criminal or civil penalties, non-compliance fines and harm to the company’s image.
Who is in Charge of Sanctions Lists?
Some examples of key bodies that are in charge of sanctions are:
- UN Security Council (UNSC)
- US Office of Foreign Assets Control (OFAC)
- World Bank Office of Suspension and Debarment (OSD)
- European External Action Service (EEAS)
- Office of Financial Sanctions Implementation (OFSI)
- Australian Sanctions Office (ASO)
For instance, the United Nations Security Council Consolidated List of Sanctions applies to all EU individuals, regardless of their location, including all entities established in the European Union. Another example from OFAC — the Specially Designated Nationals (SDN) and Blocked Persons list — applies to all US individuals, regardless of their location, as well as corporate entities established in the US. It also covers any entity that uses US goods or components, trades in US dollars, has a US parent company or affiliate, or works through a local supplier with connections in the US.
This goes to show that businesses might need to consider other sanctioning bodies as well, particularly based on the jurisdiction they operate, and other factors like which currencies they use or what kind of suppliers or partnerships they have.
What Issues Do Businesses Face Regarding Sanctions Lists?
Sanctions lists require screening during onboarding and ongoing monitoring to manage risks and keep up-to-date with relevant information effectively. This type of due diligence helps companies stay compliant by allowing them to compare previously collected client information with data on sanctions lists.
However, there are certain challenges that businesses need to overcome. For example, sanctions lists target not only specific entities, such as states, individuals and organizations, but also include sectoral sanctions (which focus on specific sectors, such as energy, rather than targeting the whole country) that prohibit certain activities, leaving room for interpretation. What’s more is that all customers that have business relationships with other sanction entities are still considered high-risk.
There are other nuances that regulated companies need to consider. For instance, organizations that are controlled/owned by sanctioned entities need to screen sanctions lists and maintain proper AML programs. Adding to the complexity, various sanctioning bodies — such as regional unions, sovereign states, and major organizations like the UN — publish their own sanctions lists, which can lead to inconsistencies or misalignment due to the differences in format.
What are the Key Requirements for Sanctions Compliance?
Legal requirements for sanctions screening depend on a company’s location, operating regions, and other factors. But the main fact is that sanctions compliance doesn’t revolve only around financial institutions. When conducting business and partnering with suppliers, vendors, new partners, or customers, businesses must comply with sanctions regulations to avoid non-compliance fines. This applies to all global companies that work internationally and need to juggle multiple sanctions regimes.
For example, sanctions compliance requires EU-based companies to screen against the Consolidated Financial Sanctions List. However, not all sanctions lists are mandatory. For instance, some jurisdictions don’t require screening lists like the World Bank Listing of Ineligible Firms and Individuals.
Beyond screening sanctions lists, companies should implement these measures to stay compliant:
- CDD/KYC processes — to flag sanctioned entities and high-risk customers at the customer onboarding stage, potentially preventing them from being accepted to the company’s network.
- AML screening — to maintain accurate data whenever sanctions lists are updated to stay compliant with the latest regulations and restrictions or when an AML red flag is detected, especially linked to high-risk clients, such as politically exposed persons (PEPs).
- Transaction monitoring — to analyze completed transactions and detect potential threats to assess customer behavior, as well as spot signs of fraud in both incoming and outgoing transactions.
The screening process also plays a primary role in the company’s overall efforts to combat money laundering, terrorism financing, and other financial crimes. Sanctions compliance helps organizations build a safer fraud prevention ecosystem and block transactions with sanctioned entities, reducing AML risks.
What to Look for in an Automated Sanctions List Screening Solution
While sanctions lists as a concept are easily understandable, the screening process can be complex because it requires administrative resources and qualified internal compliance teams that know how to handle large data volumes in line with AML requirements.
To streamline this process, companies use automated AML solutions to screen sanctions lists in real-time. The biggest benefits here are the ability to maintain updated sanctions lists data and a high-level of accuracy in terms of risk management and customer profiles.
Here’s what to consider when choosing an AML automation solution for sanctions screening:
- Entity matching capabilities. The solution should find individuals and corporate clients, screen them, extract data, and cross-reference it if needed in any format or language in order to prevent false negatives and missed matches.
- Optimized false positives. Older traditional solutions often flag legitimate transactions as matches. Your sanctions screening software shouldn’t require time-consuming manual reviews. The more data the automation solution collects on a customer, the more accurate their profile will be and the lower the risk of false positives.
- Built-in customer risk assessment. This feature helps automatically assess clients, determining the risk level (low, medium or high) and helping companies apply the correct due diligence level since high-risk customers require extra scrutiny.
- Customization options. If the solution isn’t easily adapted to your industry’s needs, market etc., it can cause scaling issues and negatively impact the end-user experience. Choosing the right AML software with not only sanctions screening but other features like KYC/KYB verification, address verification, age verification (for age-restricted item and service providers), help refine screening results.
At iDenfy, we can help you ensure sanctions compliance and align with KYC, KYB, and AML regulatory rules using a single solution that is easily implemented into new systems and doesn’t require excessive training for compliance teams.
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