Economic sanctions are restrictions on the ability of a person or entity to engage in certain activities with targeted persons or entities. Sanctions measures can vary from the comprehensive – prohibiting the transfer of any funds to a sanctioned country and freezing the assets of a government, the corporate entities and residents of the target country – to targeted asset freezes on individuals or entities. 

 

In the US, sanctions are administered and enforced by the Office of Foreign Assets Control (OFAC) as part of foreign policy and national security efforts. In Europe, Sanctions Resolutions are passed by the Council of the European Union and enforced by the regulators of each Member State. Sanctions may target governments, countries, and Specifically Designated Nationals or their equivalent (SDNs). SDNs include terrorists and terrorist organisations, narcotics traffickers, persons involved in developing and/or distributing weapons of mass destruction, and persons and entities that the applicable regulator considers to be connected to sanctioned governments.

 

Sanctions regulations generally prohibit any activities with SDNs, no matter where in the world they are located, and require that the property and assets of SDNs be blocked. Financial institutions must identify all transactions which may have connections to sanctioned countries, entities or SDNs. Connections are not always readily apparent as they could involve any property or asset — indeed, anything of value — in which the sanction target has an interest. That can include physical property, interest in an insurance policy, claims payments, investment accounts, loans, bank accounts, debt instruments, money, cheques, letters of credit, etc.

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Compliance with sanctions laws and regulations continues to be a major challenge for financial institutions, with many having already incurred significant fines and reputational damage. As a minimum, adequate sanctions screening processes and controls must be in place but importantly, organisations must be able to demonstrate that their controls are working effectively. These processes and controls may be different to those in place for money laundering purposes, because compliance with sanctions regulations means that you also need to consider to whom payments are being made and whether funds are from an entirely legitimate source.

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The number of global watch lists and sanctioned activities also continue to grow, as does pressure for financial institutions to extend their screening processes across their entire networks. In addition, sectoral sanctions, such as those targeting Russia’s financial and energy sectors and prohibiting certain types of transactions, complicate the task of distinguishing between approved and not-approved transactions.  

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