Economic Sanctions vs Political Sanctions

Have you ever wondered how sanctions whether political or economic shape the framework for international AML compliance in the financial sector?

Since the end of the Second World War, political or economic sanctions, either comprehensive or selective, have been used as a vital foreign policy instrument to achieve national security objectives globally.

But what exactly is the difference between economic and political sanctions?

If you are ever confused about the application and impact of economic and political sanctions, read this article because we will discuss the interchangeable use of these terms.

What are their exact purposes, their eventual consequences for targeted countries, and the financial industry, and how the AML Watchers can help you navigate the ever-changing landscape of international sanctions?

What Exactly Are the Political Sanctions?

Coercive measures taken to influence the state policies of a government, country, or any non-state actor are called ‘political sanction’. 

Political Sanction Examples

Therefore, political sanctions can be imposed on a country in response to:

1. Military aggression or violations of another nation’s sovereignty

For example, the unlimited sanctions on Russia are primarily a response to its invasion of Ukraine in 2022.

2. Prevent the advancement of nuclear weapons

For instance, the U.S. and the UN have imposed various sanctions on North Korea and Iran to prevent nuclear proliferation.

3. Stop grave human rights abuses by nations

For example, the United States, the European Union, and other international organizations have imposed targeted sanctions on Belarus because of its crackdown on political opposition and Myanmar because of its military coup and persecution of ethnic minorities.

Political sanctions help the international community to isolate the targeted state. The nation that levies the sanctions typically restricts its diplomatic relations as well as economic ties.

It removes the targeted country from international agreements and international institutions. And it may put a travel embargo on the leaders and state officials of the targeted country.

In contemporary geopolitics, the USA has been the dominant proponent of political sanctions.

U.S Political Sanction in 2023

The United States under the Biden administration has sanctioned 1,621 corporations and 879 individuals to its SDN sanction list in 2023, which is a 10% rise from the sanctioned entities in the year 2022.

According to a study by the Center for New American Security, sanctions by the Biden Administration relating to corruption and human rights jumped by 90% year over year, while sanctions relating to nonproliferation doubled and jumped to 133%.

Impact of Political Sanctions

The political objective of any kind of sanction is to change the political discourse or foreign policy of the targeted nation. But the results they yield are sometimes quite the opposite of what they intend to be.

Sometimes, internal protests are sparked by the threat of sanctions, which prompts governments to deploy force to quell the unrest.

Furthermore, the economic downturn caused by political sanctions frequently results in widespread protests, inflation, poverty, political instability, and other social challenges.

Such instability can lead to a rise in money laundering, corruption, terror financing, tax evasion, and other unlawful activities because weaker economies make it simpler for criminal organizations to transfer money illegally and get over financial rules.

What Are the Economic Sanctions?

In international politics, economic sanctions can be summed up as an important tool of statecraft that works as coercive measures taken by one country or an international institute to weaken the economy of the targeted country.

These can also be imposed by international organizations like the United Nations.

The use of economic sanctions has skyrocketed since the end of the Cold War in 1989.

For the imposing country, economic sanction is considered a more reasonable alternative to military intervention since they are cheap, less controversial, and less violent measures to achieve their foreign policy objectives.

Economic sanctions can be unilateral (imposed by one state) or multilateral (imposed by multiple states).  They can take three forms:

1. Financial Sanctions: These include the freezing of foreign assets of the political elite of the sanctioned state as well as a ban on access to international financial systems like the US restricting the use of Russian SPFS.
2. Travel Sanctions: Ban on the international travel of the political and economic elite of the sanctioned country.
3. Trade Sanctions: Ban the imports and exports of goods and services of the sanctioned state; like the US always banned China’s trade.

Economic sanctions are typically imposed by countries with stronger economic systems, or having stronger political presence.

The targeted countries are generally those that are seen as threats to international stability or violate international norms, such as Iran, North Korea, Russia, etc.

According to a report published by the Washington Post, one-third of all nations on Earth, including more than 60% of developing countries, have been subject to sanctions from the US government.

Economic Sanction Examples

They result in a trade embargo (import or export of goods and services) for the targeted country. It excludes access of targeted states to financial markets like SWIFT as in the case of Russia.

Economic sanctions are imposed to change the government policy or state behavior of the targeted state.

U.S Financial Sanctions in 2023

In 2023, the Biden government sanctioned 467 corporations and blocked their capacity to buy U.S.-made products and technologies.

Given the Russian invasion of Ukraine, 44 percent of its Entity List consists of Russian entities, and 33 percent of Chinese due to the ongoing US-China trade war.

The Biden Administration has also introduced secondary sanctions (to make the primary sanctions more effective) which are designed to target foreign financial corporations and may facilitate the evasion of imposed sanctions by sanctioned countries like Russia, China, North Korea, and Iran.

Impact of Economic Sanctions

Economic sanctions usually lead to GDP decline in targeted nations, though the impact varies based on the severity and type of sanctions.

Country-wise sanctions like U.S. sanctions often cause moderate economic decline, while UN sanctions can also strain economies, especially in vulnerable nations.

The actual effect depends on the targeted country’s economic structure and the sanctions imposed.

The decline in GDP leads to declination in trade, investment, private consumption, and government expenditure.

People or groups in sanctioned countries may also try to avoid the restrictions by conducting money laundering, tax evasion, and other illegal activities through less regulated channels; these routes are often ones with weak financial regulations.

Interestingly, nations that impose sanctions also suffer consequences; it’s not just the targeted states that bear the costs of being sanctioned by big economies.

International Sanction Governing Bodies

Following are some of the Sanction-Imposing Bodies around the world.

Sanction-Imposing Governments Around the Globe

1. US Treasury’s Office of Foreign Assets Control (OFAC)
2. Japan Ministry of Economy, Trade, and Industry (METI)
3. Swiss State Secretariat for Economic Affairs (SECO)
4. Canadian Department of Foreign Affairs, Trade and Development (DFATD)
5. United Kingdom Office of Financial Sanctions Implementation (OFSI)
6. Australian Department of Foreign Affairs and Trade (DFAT)
7. South Korean Ministry of Foreign Affairs

International Sanction Imposing Institutes

1. United Nations Security Council Sanctions – UNSC
2. Sanctions Committees of the European Union Council

At this point, you must be wondering how institutions would know about global sanctions and how they avoid dealing with sanctioned entities or in sanctioned jurisdictions.

The answer is simple: implementing an effective sanction screening solution that automatically detects and prevents sanctioned entities and individuals from being involved in business activities.

So, where can you find such a screening solution?

Here it is:

How AML Watchers Can Help Prevent Political And Economic Sanction Avoidance

AML Watcher provides an advanced screening solution that assists businesses in adhering to global sanctions regulations, avoiding any violations and financial dangers.

AML Watcher helps avoid sanction evasion in the following ways:

Real-Time Sanction Screening

AML Watcher ensures that companies avoid doing business with people or organizations that have been sanctioned by instantly monitoring transactions and people against international sanctions lists (such as the OFAC, UN, and EU).

AML Watcher covers a range of sanctions lists like:

• OFAC SDN List (U.S. Department of the Treasury – Office of Foreign Assets Control)
• UN Security Council Sanctions List
• EU Sanctions List (European Union)
• UK HM Treasury Sanctions List (Office of Financial Sanctions Implementation – OFSI)
• Canadian Sanctions List (Global Affairs Canada)
• Australian Sanctions List (Department of Foreign Affairs and Trade – DFAT)
• Swiss SECO Sanctions List (State Secretariat for Economic Affairs)
• Russian Sanctions List (from the Russian Government)
• FATF List (Financial Action Task Force – High-Risk and Non-Cooperative Jurisdictions)

Secondary Sanction Screening

With AML Watcher’s Secondary Sanction Screening, institutions can onboard customers flagged by secondary sanctions after evaluating the risks and making compliance decisions that fit their risk appetite and business strategy.

This allows for compliance with EU standards while limiting exposure to non-applicable U.S. sanctions, ensuring a more customized approach to risk management.

Up-to-Date Sanction Lists

AML Watcher keeps its 100,000+ database up to date with modifications to international sanctions lists or sanction delisting, ensuring that companies are constantly in compliance with the most recent rules.

Detailed PEP Screening

AML Watcher’s PEP screening identifies high-risk individuals by cross-referencing global Politically Exposed Persons (PEPs) databases. This process highlights individuals with elevated risks of involvement in corruption, money laundering, or terrorism.

AML Watcher ensures timely detection of sanctioned PEPs, helping institutions mitigate potential compliance and financial risks, by screening PEP risk levels 1-4 in real-time.

Separate Watchlist Screening

AML Watcher offers access to an extensive database of over 3,500 separate watchlists and ensures that every transaction, individual, or entity is screened against a comprehensive set of authoritative sources in real time.

This provides unparalleled protection against financial crimes and sanction violations.

Cross-Border Transaction Monitoring

The system monitors global transactions and looks for unusual trends that can point to strategies for evading sanctions, such as passing money through high-risk countries.

Integration of Biometric AML screening

AML Watcher incorporates biometric AML technology, which combines image matching and name screening to further minimize false positives.

The accuracy of client screening procedures is greatly improved by this integration, ensuring that matches are real and not accidental.

Detailed Due Diligence

AML Watcher’s comprehensive due diligence identifies possible threats, including politically exposed persons (PEPs) and businesses trying to evade sanctions, for high-risk customers and locations.

Advanced Name Matching Algorithms

AML Watcher’s name-matching tool matches names across a variety of variants, including spelling variations, aliases, and cultural naming traditions, using complex algorithms to identify sanctioned parties.

This greatly improves the efficacy of compliance screening by ensuring that people or organizations trying to evade detection using different name variants are appropriately reported.