What are sanctions?

To address violations of international law, human rights abuses, other state-sponsored crimes, and threats to international security, governments may impose sanctions against designated targets around the world. Sanctions are a range of restrictions and penalties imposed on countries, entities, or individuals to discourage these activities and resolve geopolitical conflicts without resorting to military intervention. 

The efficacy of sanctions depends on the ability of the issuing country to enforce them. Regulatory bodies, such as the US Department of the Treasury’s Office of Foreign Assets Control (OFAC), publish sanctions lists identifying designated targets. Countries then enforce compliance through regulations and impose criminal penalties for violations.

Since sanctioned individuals or entities often seek to circumvent sanctions and continue conducting financial transactions, sanctions screening is crucial to AML regulatory compliance. Financial institutions (FIs) must, therefore, not only understand their compliance obligations but also stay updated on the latest sanctions and implement effective measures to address them. To support these efforts, this 2024 guide to sanctions will cover:

• Different types of sanctions.
• How sanctions work.
• Advanced solutions for effective sanctions compliance. 

What are the main types of sanctions?

Sanctions can either be primary or secondary. 

• Primary sanctions restrict individuals or entities within the issuer’s jurisdiction. For example, a US citizen being barred from doing business with a company in North Korea that has been sanctioned. 
• Secondary sanctions target those outside the issuer’s jurisdiction who deal with sanctioned entities, such as a European bank facing penalties or losing access to the US financial system if it conducts transactions with that North Korean company. 

Across these two types, sanctions fall into six main categories. 

Economic sanctions

Economic sanctions are imposed on countries, institutions, or individuals and aim to restrict their ability to conduct trade or financial transactions. These include import and/or export embargoes, trade and investment bans, and asset freezes. 

Diplomatic sanctions

Diplomatic sanctions are a less severe set of measures than economic sanctions and typically involve removing diplomatic ties and expelling diplomats from the country issuing the sanctions. 

Military sanctions

Military sanctions involve armed intervention. Since the use of military force is heavily restricted by international law, military sanctions are significantly rarer and more severe than other kinds. Economic sanctions that target a country’s military capabilities, such as an arms embargo, are also sometimes classed as military sanctions.  

Sporting sanctions

Sporting sanctions prevent targeted nations from participating in the international sporting scene, which means that athletes from these nations cannot compete in events, and competitions cannot be held in sanctioned countries. 

Environmental sanctions

Environmental sanctions are a more recent invention than other kinds of sanctions. Rather than a new type of sanctions altogether, they are a mixture of economic and diplomatic sanctions specifically relating to offenses against environmental protection. 

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How do sanctions work?

Globally, sanctions are set by various national and international bodies and operate under the terms specified by each authority. Below is a list of key bodies responsible for issuing and enforcing sanctions. 

UN sanctions 

As a pre-eminent global intergovernmental body, the United Nations takes a leading role in issuing sanctions. These are outlined in the UN Security Council (UNSC) Consolidated Sanctions List, which applies to all UN member states. The UN typically imposes sanctions for three types of behavior: violations of international law, threats to international peace, and violent activity within state borders. 

However, UN sanctions are only passed when a majority of the UNSC votes in their favor. The UNSC consists of five permanent members (the US, the UK, France, China, and Russia) and ten non-permanent members on rotation. Any of the five permanent UNSC members may veto their application, which can hinder action; Russia has vetoed sanctions on North Korea, for example. The UN has no direct legislative power within member states, so it falls to domestic legislative authorities to enforce UN sanctions when they are passed. 

Sanctions in the US 

The Office of Financial Assets Control (OFAC) maintains sanctions programs in the US. Its sanctions lists include the Consolidated Sanctions List and the Specially Designated Nationals (SDN) List. The US Bureau of Industry and Security (BIS) also maintains the BIS Entity List, detailing foreign entities subject to Export Administration Regulations (EARs). These typically regulate the export of dual-use goods that terrorists or oppressive governments may misuse. 

The US sanctions regime is arguably the most influential in the world. Since the US shares many geopolitical, economic, and security concerns with other Western nations, its sanctions programs typically align with those of the UN, the UK, and the EU. In 2016, the US introduced a dedicated human rights sanctions program under the authority of the Global Magnitsky Act. This allows the US government to specifically address global human rights abuses by targeting the individuals and groups responsible for those crimes, rather than entire countries. The Magnitsky Act has inspired the development of similar human rights sanctions regimes across the West. 

Sanctions in the EU 

The EU issues various sanctions against global targets. The EU enforces some sanctions directly through EU law, but some measures are delegated to the domestic legislators of member states; all individuals and entities within the European Union’s 27 member states, alongside EU citizens operating anywhere in the world, must observe EU sanctions. 

The EU Council implements UN and autonomous sanctions set out in the EU Consolidated Sanctions List. The EU’s sanctions regime has evolved since its inception. In May 2019, the EU introduced a cyber-crime sanctions regime, and in December 2020, a Global Human Rights Sanctions Regime (GHRSR), which specifically targets human rights abuses. The EU also has a Blocking Statute, which prevents EU persons from complying with secondary sanctions imposed by third countries. EU sanctions enforcement falls to member state governments rather than a centralized authority, and member states also control the penalties imposed for sanctions violations. 

Sanctions in the UK

HM Treasury maintains the sanctions list of the United Kingdom, while the Office of Financial Sanctions Implementation (OFSI) is responsible for implementing and enforcing these sanctions. The UK list incorporates the consolidated UN and EU sanctions lists as well as the UK’s autonomous sanctions, which it has issued since its exit from the EU in 2020 under the Sanctions and Anti-Money Laundering Act (SAMLA). All FIs are forbidden from doing business with the countries and entities on the HM Treasury Sanctions List. British citizens and citizens of overseas territories are also subject to HM Treasury sanctions. Like the US, the UK has also implemented human rights sanctions and Global Anti-Corruption regimes. 

Sanctions in 2024 

Given the number of sanctions regimes currently active worldwide and the rate at which new entities are added to sanctions lists, it is impossible to present an exhaustive list of current sanctions (the EU, for example, has 30 sanctions programs in place as of August 2024). However, a few key trends are particularly relevant for FIs in 2024. 

Sanctions on Russia

Sanctions against Russia have dominated the international sanctions landscape since the country invaded Ukraine in 2022 (although sanctions have been present in some form since 2014 owing to Russian aggression in the region). The US, UK, and EU, among others, have imposed measures on Russia, including state-level and individual sanctions, including import and export restrictions, asset freezes, and diplomatic sanctions. Belarus has also been targeted with sanctions for its support of Russia. 

Sanctions on Iran 

Iran’s nuclear proliferation program, military support for Russia, and human rights violations have prompted a range of sanctions from the US, the EU, and a host of other countries. Although a partial rapprochement occurred after the Biden administration lifted some sanctions as part of what it called a “good faith approach”, the US has since reiterated its commitment to countering Iran’s nuclear missile development through sanctions. After the UN’s sanctions on Iran expired in October 2023, the UK, France, and Germany carried them into their domestic legal frameworks. 

Sanctions on North Korea  

Sanctions on North Korea have been in place since 2006, primarily due to the country’s nuclear weapons testing. The UN Security Council has passed various resolutions sanctioning North Korea, while several countries have implemented additional sanctions, including South Korea, Japan, and the US. OFAC has published several documents detailing interpretive guidance on North Korean sanctions, and on recognizing evasion techniques. 

Other global sanctions  

• Sanctions on Israeli settlers: While no sanctions on the state of Israel are in place, several individuals and entities linked to settlements in the West Bank have been sanctioned by countries including the US, UK, and Australia. 
• Sanctions on Venezuela: Venezuela has been subject to economic and diplomatic sanctions, primarily issued by the US, including trade embargoes, financial market restrictions, and entry bans. 
• Sanctions on Myanmar: Human rights violations against the Rohingya minority have been cited as the primary reason for sanctions against Myanmar by the US, EU, UK, Canada, and Australia. 
• Sanctions on China: The US and EU have imposed targeted sanctions against Chinese individuals and organizations in response to the production of fentanyl, persecution of Uyghurs, support for Russia’s invasion of Ukraine, and human rights violations in Hong Kong and Tibet. 

Sanctions screening for AML 

FIs need to have effective sanctions screening in place to avoid the reputational and financial consequences of non-compliance with sanctions, which should include certain best practices: 

• Adopt a risk-based approach: The starting point for any element of an AML compliance program is a risk-based approach, which allows FIs to prioritize higher-risk customers in screening and monitoring processes. Firms should identify where they are most likely to face risk based on the products or services they offer and the profiles of their customers and allocate resources accordingly to avoid non-compliance with sanctions without applying overly restrictive measures where they are not necessary. 
• Take a layered approach to compliance: Firms should choose a multi-faceted sanctions screening strategy combining different tools and processes to avoid relying solely on one line of defense when mitigating sanctions-related risks. In practice, this might involve appointing a compliance officer, conducting thorough staff training, scheduling audits, and leveraging comprehensive data and specialist software to automate sanctions screening processes where beneficial for greater efficiency. 
• Using the highest-quality data possible: As part of customer due diligence (CDD), FIs must screen customers against sanctions and watch lists to ensure they are not doing business with sanctioned entities. Access to accurate, complete, relevant, and recent sanctions information makes this task significantly easier, so firms should regularly update their data and check for any gaps or inconsistencies. 
• Establish ultimate beneficial ownership (UBO): Subjects of sanctions may try and disguise their identity to FIs by using a network of individuals and companies to conduct transactions on their behalf. Firms must establish UBO where there is a possibility of a customer acting on behalf of someone else. 
• Conduct ongoing monitoring: Sanctions compliance continues beyond customer onboarding, especially given the dynamic nature of sanctions lists. Transactions should also be continuously monitored for the possible involvement of sanctioned entities and any suspicious activities reported to the authorities. 

Advanced solutions for sanctions screening

FIs worldwide rely on ComplyAdvantage’s sanctions screening software’s speed, accuracy, and ease of use. ComplyAdvantage’s data is powered by cutting-edge AI and refined by expert manual reviews. It goes beyond the minimum demanded by regulators by including entities linked to or controlled by those on sanctions lists, allowing firms to manage risk proactively, not reactively. 

By using ComplyAdvantage’s software, FIs can: 

• Get sanctions updates in near-real time with data sourced from multiple global sanctions and watch lists and refreshed using automated systems. 
• Avoid missing sanctions violations with configurable screening alerts that use industry-leading screening algorithms and flexible fuzzy matching to account for name variants. 
• Reduce onboarding times by up to 83 percent using a risk-based approach to customize their sanctions screening, with delays caused by false positives kept to a minimum. 
• Benefit from the efficiency of integrated workflows, from alert remediation to case management, using REST APIs. 
• Review alerts faster with customer profiles that consolidate sanctions data alongside politically exposed person (PEP) data, watchlists, fitness and probity data, and adverse media.