Sanctions serve as penalties imposed on individuals, businesses, or governments engaging in prohibited activities, such as supporting terrorist organisations or transnational crime. Financial entities, including banks and money services businesses adhering to Anti-Money Laundering (AML) regulations, must be aware of sanctions and their implications for compliance risk.
Types of Sanctions
Sanctions, wielding diplomatic and economic pressure, aim to achieve specific outcomes. They can target individuals, businesses, organisations, or entire governments, employing measures like trade barriers, asset freezing, or travel restrictions. Let us examine a few distinct types of sanctions:
- Targeted Sanctions
- Aimed to disrupt the finances or operations of entities linked to sanctioned conduct
- Measures may include asset freezes, travel bans, or visa restrictions
- Comprehensive Sanctions
- Applied to entire countries or regions to isolate them economically and politically
- Examples include trade restrictions, investment barriers, and limitations on financial transactions
- SMART Sanctions
- Focused on specific sectors of a country, designed to minimise impact on the masses
- Common during economic sanctions, often covering finance and security sectors
Entities may face restrictions from international bodies such as the United Nations Security Council, regional entities like the European Union, or specific countries like the United States, Canada, and Australia. Regulated entities must monitor changes and ensure the presence of relevant processes and systems. In general, entities must refrain from engaging in banking or receiving payment instructions from sanctioned individuals, businesses, or countries.
The Impact
Effects may include economic contraction, currency devaluation, and restrictions on exports or access to funding. To mitigate risks such as fines and reputational damage, regulated entities must conduct Enhanced Due Diligence on individuals or businesses susceptible to sanctions. They should also remain vigilant against the possibility of sanctioned individuals evading or circumventing restrictions, often through the use of shell businesses or third parties.
How to Comply with Sanctions Regulations?
Regulated organisations must screen clients, transactions, and parties against sanctions lists, blacklists, and warning lists. AML/CTF protocols, including Know Your Customer (KYC) and Customer Due Diligence (CDD) regulations, transaction monitoring, and risk assessment, are imperative in this regard. Employee training is essential to enable them to identify risks and promptly report suspicious transactions to the appropriate authorities.
FAQs
What are sanctions?
Sanctions are punitive measures applied by governments or international organisations to limit or penalise specific activity in order to influence political or economic behaviour. Trade restrictions, asset freezes, travel bans, and financial sanctions are examples of actions that can be used against countries, organisations, or individuals.
Who imposes sanctions?
They can be imposed by individual countries, groups of countries, or international organisations such as the United Nations (UN), the European Union (EU), and the United States (via OFAC).
How do sanctions impact the targeted country or entity?
They can inflict economic hardship through restricted trade and financial activity, put political pressure on governments to change policies, lead to international isolation, and frequently have humanitarian consequences for civilians by limiting access to needed products and services.
How do sanctions affect multinational businesses?
They have an impact on global businesses by limiting market access and opportunities, increasing compliance and operational costs, creating legal and reputational risks, disrupting supply chains and international partnerships, and requiring businesses to navigate complex regulatory environments while ensuring strict compliance.
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