Do All Types of Sanctions Work the Same Way?

On October 30, 2024, the U.S. Department of the Treasury sanctioned 275 individuals and organizations throughout 17 jurisdictions for providing Russia with the latest equipment and technology it needed to power its warship.

The act disrupts international networks of evasions and targets Russian importers and manufacturers of essential inputs and other supplies for Russia’s military-industrial base.

Sanctions have long been an important tool utilized by governments globally to combat state-sponsored crimes, human rights violations, international law violations, and threats to international security.

Sanctions act as an alternative to military action in disputes with geopolitics by placing limitations on specific people, nations, or organizations.

Sanctions, however, need to be carefully implemented to be effective. Regulatory institutions, including the European Union and the Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury, play key roles in maintaining compliance.

To avoid being caught in a scenario where they face embargo-related penalties. Financial institutions (FIs) need to make sure their activities adhere to AML compliance requirements and keep up with sanctions lists.

Moreover, global trade sanctions limit the trading of products and services from or to sanctioned countries.

Banning international trade with sanctioned countries puts pressure on countries that are involved in illicit activities and puts risks to the integrity of the financial system.

This article will go over in detail:

• Different Sanction Types
• How Sanctions Operate
• Key Sanction Regulations
• Innovative Approaches to Sanctions Compliance

What Are the Main Types of Sanctions?

Sanctions can be enforced in a variety of ways. Their scope and impact vary depending on whether they are primary or secondary.

1. Primary Sanctions

“This type of sanctions is imposed directly on individuals or entities that fall under the issuing nation’s jurisdiction.”

Real Case

An individual who violates the Iranian Transactions and Sanctions Regulations faces a $1.1 million penalty from OFAC. In particular, he violates the primary sanctions imposed by the U.S. government.

2. Secondary Sanctions

These target “foreign organizations that conduct business with sanctioned organizations that do not fall under the jurisdiction of the issuing nation.”

Real Case

The US has enforced extensive sanctions on Russian banks and financial institutions, especially targeting Gazprombank, Russia’s only remaining sanctioned bank, which falls under economic and secondary sanctions.

The FATF has emphasized in its Recommendations 6 and 7 that countries must implement enhanced due diligence against sanctioned entities and apply countermeasures against higher-risk jurisdictions with deficiencies in their AML regulations.

Why They’re a Bigger Deal Than You Think?

Sanctions are not only tools of diplomacy; they are enforcement measures intended to ensure that countries, businesses, and individuals adhere to international AML laws and agreements.

As soon as these entities violate global norms, whether through illicit trade, human rights abuses, or other misconduct, sanctions act as a powerful prevention.

As per the Financial Action Task Force’s recommendation 6, countries are required to implement Financial sanctions on the targeted countries to suppress terrorist’ and terrorist financing.

The recommendation further highlights the significance of sanctions and fear; “Efforts to combat terrorist financing are greatly undermined if countries do not freeze the funds or other assets of designated persons and entities quickly and effectively.”

Do All Sanctions Work the Same Way?

Sanctions come in many forms, such as “economic, trade, military,” and their application varies based on the enforcer’s motives and the target’s behavior.

Governments impose these measures to advance their strategic consideration while international regulatory bodies aim for broader, unified goals.

However, not all sanctions operate the same way, and their impact hinges on the type of sanction and the targeted entity.

Mainly sanctions fall into six major categories:

What are Economic Sanctions?

Economic sanctions prohibit the target people from making investments, commerce, and financial transactions with other entities in the world, hitting the country or business where it matters the most.

The idea is simple: apply financial pressure to force a change in policy or behavior, as seen in the wide-ranging sanctions against Russia that have targeted its energy and banking sectors.

What are Travel Sanctions?

Travel sanctions block individuals from entering or moving through certain countries. These are often used against political leaders, military officials, or business figures associated with sanctioned regimes.

For instance, Syrian officials who were banned from travel isolated themselves from key diplomatic and economic engagements.

What are Trade Sanctions?

Trade sanctions prohibit businesses from exchanging goods with sanctioned entities. Whether it’s banning luxury goods or limiting access to essential materials, trade sanctions aim to disrupt economic activity.

What are Diplomatic sanctions?

Diplomatic sanctions involve scaling back or severing diplomatic ties. These might include expelling ambassadors or limiting high-level government contact.

After Myanmar’s military coup, several nations imposed diplomatic sanctions, sending a clear message of disapproval while reducing formal channels of communication

What are International Sanctions?

International sanctions are imposed by one or group of countries or organizations such as the United Nations, to impact the “behavior of a target country, entity, or individual”.

These sanctions are implemented in response to breaching the AML/CFT laws.

What are Financial Sanctions?

Financial institutions strictly restrict individuals, countries, and businesses from selling, purchasing, and accessing financial services from sanctioned entities.

Under the financial sanctions, countries can freeze assets, block financial transactions, and restrict access to global capital.

For instance, when Iran was excluded from SWIFT, its ability to trade internationally and manage its economy was severely impaired, showcasing the devastating effects of financial sanctions.

What are Environmental Sanctions?

A more recent category targets organizations or countries that break environmental regulations or carry out actions that endanger the world’s ecological systems.

How Sanctions Work in Global Enforcement Mechanisms?

Sanctions are ‘enforced by various national and international bodies.’ Different authorities set and enforce sanctions by:

UN Sanctions

A significant role in imposing sanctions is played by the United Nations (UN), usually through the UN Security Council (UNSC). These penalties focus on three main areas: violent conduct within states, global peace risks, and international law violations.

Imposed Sanction Case

North Korea has been subject to UN sanctions since 2006 as a result of its nuclear weapons testing.

These sanctions were unanimously imposed by the UN Security Council, but the US and the EU have taken further action to implement them.

US Sanctions

The “OFAC-managed U.S. sanctions regime” is one of the most influential in the world.

US sanctions are financial and economic penalties enforced by the US government against foreign persons, organizations, or nations that participate in actions that are thought to be detrimental to US interests.

Russia has been subject to economic penalties by the US since 2022 for its role in the invasion of Ukraine. These measures included limitations on Russian banks, energy exports, and state-owned enterprises.

Secondary sanctions were also imposed on international corporations that were still doing business with Russia, indicating that failure to comply could result in expulsion from the global financial system.

EU Sanctions

The European Union targets people, organizations, and nations with sanctions through its Consolidated Sanctions List.

The EU’s approach is distinct in that it prohibits European companies from adhering to secondary penalties imposed by foreign nations through its Blocking Statute.

In 2020, the EU launched the Global Human Rights Sanctions Regime (GHRSR) to demonstrate its commitment to holding offenders accountable, which focuses on human rights violations in nations like Belarus and Myanmar.

UK Sanctions

HM Treasury oversees the UK sanctions list, including EU and UN penalties and independent UK actions following Brexit.

The UK’s Global Anti-Corruption and Human Rights Sanctions campaigns have been revamped since it left the EU.

In response to the invasion of Ukraine, the UK placed sanctions on Russian billionaires in 2022, suspending investments and focusing on the assets of important Kremlin-affiliated individuals.

What Are The Best Practices For Sanctions Screening?

Effective sanctions screening is essential for financial institutions to minimize legal and reputational concerns. The following are some recommended practices:

• Adopt a Risk-Based Strategy

Depending on the jurisdiction, industry, and financial activity involved, prioritize high-risk clients and transaction screening.

• Multi-Layered Compliance

Implement various techniques, including adverse media checks, PEP screening, and sanctions lists, to improve compliance.

• Access to High-Quality Data

Ensuring accurate, up-to-date sanctions data from reliable international sources supports screening procedures.

• Ongoing Monitoring

Ongoing monitoring of customers and their transactions is important to guarantee adherence to changing penalties.

Where to Find Advanced Sanctions Screening Solution?

AML Watcher offers a comprehensive and proactive solution to help financial institutions (FIs), and DNFBPs stay updated about the latest sanctions and ensure complete sanction compliance with evolving regulatory standards.

AML Watcher helps with sanctions screening:

Real-Time Sanctions List Updates

AML Watcher offers real-time access to the most up-to-date sanctions lists from multiple global regulatory authorities, including:

• OFAC (U.S. Department of the Treasury’s Office of Foreign Assets Control)
• UN Security Council
• EU Sanctions List
• UK HM Treasury

Delisting Sanctions

AML Watcher also keeps you updated on sanctions delistings in real-time, removing delisted entities from your screening data sources to reduce false positives and ensure a higher exact matched rate.

Data Coverage Across Multiple Jurisdictions

No matter where you or your clients are situated, AML Watcher’s solution ensures global sanctions compliance across more than 200 sanctions regimes.

• High-Quality Data

AML Watcher incorporates the relevant sanctions lists unique to your jurisdiction and business operations, regardless of whether your company is based in North America, Europe, Asia, or Africa.

Updated lists With Continuous Monitoring

AML Watcher’s proactive sanctions screening solution screens your customers against the latest sanctions lists, ensuring that no individual or organization connected to your business is violating regulations.

• Ongoing monitoring

Sanctions lists are continuously updated (often as frequently as every 15 minutes), allowing AML Watcher to flag matches in real time.

• Transaction screening

It’s not just about client onboarding. AML Watcher screens transactions in real-time to detect any potentially illicit activity involving sanctioned entities.

Adaptable Risk-Based Screening

AML Watcher enables organizations to implement a risk-based approach for sanctions compliance. This enables companies to customize their screening policies, prioritize higher-risk clients or entities, and adjust alerts according to risk profiles.

• Configurable screening thresholds

Set specific match rules based on risk tolerance.

• Targeted monitoring

Monitor higher-risk regions, industries, and customer types that are more likely to be exposed to sanctions violations.

Reduce False Positives

AML Watcher utilizes advanced “fuzzy matching algorithms to reduce false positives” and ensure the system delivers highly accurate results.

This saves time and money by decreasing the number of manual reviews, reducing false results, and increasing the effectiveness of compliance initiatives.

• Name matching

The system matches customer names with those on sanctions lists, even accounting for name variations and transliterations.

• Entity linking

It cross-match individuals or companies with sanctioned entities, including subsidiaries or affiliates.

Detailed Adverse Media Screening

AML Watcher offers adverse media screening to detect any negative news or potentially criminal activities associated with sanctioned individuals or entities.

This helps spot higher-risk individuals who may not be on sanctions lists yet but present a legal or reputational threat.

Streamlined Case Management

AML Watcher offers integrated case management that streamlines the process of investigating and remediating sanctions matches.

When a potential issue is flagged, the system generates a case, providing compliance teams with all relevant data, including risk scores, historical interactions, and regulatory details, to facilitate quick, informed decision-making and efficient resolution.