As of April 2023, the UK government lists over 16,000 sanctions on individuals and entities from across the globe: from Venezuela, Russia, Afghanistan and Belarus to the Democratic People’s Republic of Korea, Haiti and Iran. The type of economic sanction imposed can vary from assets being frozen, travel bans, trade embargoes, and financial restrictions.
What are sanctions?
Economic sanctions are penalties applied by governments to restrict trade and financial transactions with countries, entities, and individuals that are deemed to pose a threat to national security, foreign policy, or human rights.
While used primarily as a political tool, they have significant implications for Anti-Money Laundering (AML) compliance and financial institutions’ obligations to prevent illicit finance.
Who compiles the financial sanctions list?
Sanction lists in the UK are imposed by HM Treasury. The Office of Financial Sanctions Implementation (OFSI) is the authority for financial sanctions in the UK and they publish details of restrictions imposed on nations, companies, and individuals. Different types of sanctions are used depending on the intended outcome. For example, economic sanctions aim to restrict the export of goods from a particular country, impose trade barriers, or hefty tariffs).
The UK government publishes the UK Sanctions List, which provides details of those designated under regulations made under the Sanctions Act. The list also details which measures apply, and in the case of UK designations, provides a statement of reasons for the designation.Gov.uk
Why are they used?
The primary objective of sanctions is to limit the targeted entities’ ability to access the international financial system, which includes freezing their assets, denying them access to credit, and restricting their ability to engage in international trade. This process aims to disrupt and weaken the targeted entities’ ability to fund their operations, acquire weapons or technology, and finance their illicit activities. In essence, sanctions are a form of financial pressure aimed at forcing the targeted entities to change their behaviour or face consequences.
AML compliance plays a critical role in the implementation of economic sanctions by financial institutions. The financial industry’s compliance obligations are governed by various regulations, such as the UK’s Sanctions and Anti-Money Laundering Act 2018 (the Sanctions Act), the USA’s Patriot Act, and the Bank Secrecy Act, among others. These regulations require financial institutions to establish policies and procedures that enable them to detect and report suspicious transactions and to ensure that they do not inadvertently facilitate transactions that violate economic sanctions.
Conducting a sanction check
AML compliance programmes must be designed to identify, monitor, and report transactions that involve individuals or entities subject to sanctions. This means that financial institutions must conduct robust due diligence on their customers, including screening them against sanction lists, such as the Office of Financial Sanctions Implementation list issued by His Majesty’s Treasury in the United Kingdom or the Office of Foreign Assets Control (OFAC) list in the United States. Financial institutions must also monitor clients throughout the duration of their relationship and report any suspicious activity that may indicate an attempt to circumvent economic sanctions.
To comply with economic sanctions, financial institutions must establish strong internal controls that enable them to detect and prevent potential violations. These controls include monitoring, customer due diligence, sanctions screening, and employee training.
Financial institutions must also maintain comprehensive records of their compliance efforts, including documentation of due diligence, sanctions screening, and suspicious activity reporting.
Failure to comply with sanctions can result in severe financial and reputational damage, as well as legal and regulatory consequences. Therefore, it is critical that financial institutions prioritise their AML compliance efforts to mitigate these risks.
Post updated: Thursday 16th November 2023