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Company Check Jun 05, 2023

How Sanction Checks Became Indispensable for Businesses

While sanction checks are mandatory in many jurisdictions, businesses are taking them more seriously than mere routine procedures. It happens for several reasons. Apart from financial risks, sanctions are associated with legal risks, reputational damage, and loss of promising partnerships. Thus, cooperation with sanctioned entities may have a snowball effect on all operations of the organisation.

Thorough sanction checks will help organisations to avoid negative consequences. Such screening aims to detect undesirable clients and contractors, which violate the law. 

In the ever-changing world of sanctions — with complex regulations on local and international levels — it becomes increasingly difficult for companies to keep up with their compliance obligations. For this reason, they are adopting automatic software to navigate a large data volume and multiple sanction lists.  

With LIGA UNITED functionality, you’ll find dossiers on millions of companies and will make informed decisions without risks. 


What Is a Sanction Check and What Are Its Purposes?

A sanction check is a type of screening in registers, open sources and databases to collect information on persons and organisations. It aims to uncover risk factors related to the potential client, contractor, or partner. The latter include involvement in illegal activities, negative media reputation, precarious financial situation, etc. 

Sanction targets are prohibited from some activities and services. Depending on the register, regulations might be introduced at the industry-, state- or international level. Actions may take various forms, from freezing the target’s bank accounts and travel restrictions to diplomatic measures against whole countries and regimes (such as the recent example of global sanctions against the Russian war in Ukraine).

Sanction checks are mandatory for all industries. Some of the most regulated organisations are represented in the banking, technology and defence sectors.


What Is a Sanctions List?

Sanctions lists are special directories of persons and companies, whose activities are restricted in certain jurisdictions or internationally. 

Sanctions are adopted for different causes, such as affiliation with regimes violating international law or the national security of other countries. Such measures are intended to limit the operations of targeted entities and cause them to change their actions. The most common restrictions imposed on states relate to trade and economic operations.

Sanctions lists are introduced by government agencies. Each country has its regulator to supervise restrictions and make sure citizens and organisations follow their legal requirements. 

Here are several lists relevant to UK businesses:

LIGA UNITED will help you to quickly search companies in all lists. 


How Does the Sanctions Check Work?

In simple terms, a sanctions check is a procedure for looking for matches in relevant lists for the company’s jurisdiction. However, there are some screening challenges:

  • Searching information in multiple registries and databases.
  • Monitoring updates.
  • Discovering a company's hidden business connections.

LIGA UNITED makes screening easier, enabling you to get information at your fingertips and make risk-free decisions. The system analyses data on two levels:

  1. Searches for sanctioned organisations throughout multiple worldwide databases.
  2. Checks company connections (common beneficiaries and owners, addresses, etc).

Sanctions meaning is ubiquitous for businesses because it is connected with many processes required for the company's stability. An effective compliance strategy will guarantee the legitimacy and positive reputation of a company. 


Which Companies Need to Be Screened for Sanctions?

Sanction checks are mandatory in certain states, regardless of the business sector. This means firms must establish appropriate control mechanisms in place. 

In practice, some industries have higher compliance demands — such as financial organisations — but governments are moving their focus to other industries as well. 

For instance, HM Treasury in the UK issued some recommendations for NGOs regarding their sanction obligations and requirements. Violating compliance requirements may result in serious financial losses and/or criminal offences. In the UK, a person or a firm can face up to 7 years in prison or up to a £1 million fine for failure to perform financial sanctions checks.

Penalties might be imposed not only for violations per se but for the lack of appropriate screening procedures. Thus, companies have to adopt adequate control mechanisms concerning contractors and clients, as well as internally — to beneficiaries, top managers, and suppliers. 


Sanctions Authorities in the UK

Several bodies are involved in regulating sanctions in the UK.

The Office of Financial Sanctions Implementation (OFSI) by HM Treasury is responsible for developing regulations, enforcing penalties for non-performance sanction checks, and overseeing the sanction regime in the country.

Restrictions related to trade and importing/exporting operations fall under the responsibility of Her Majesty’s Revenue & Customs (HMRC) and the Export Control Joint Unit (ECJU).

The Financial Conduct Authority (FCA) supervises compliance systems in organisations and makes sure that firms conduct an adequate screening process and meet their obligations. 

It should be noted, however, that compliance demands to companies go beyond the scope of local regulations. This is especially relevant to international firms, who must follow the legislation of all countries they operate in. Lists by the EU and the UN are examples of international regulations to follow. US OFAC Sanctions are commonly monitored in western jurisdictions as well. 

In the UK, The Foreign & Commonwealth Office defines sanction scope in line with international requirements. 


Foreign Account Tax Compliance Act (FATCA)

The Foreign Account Tax Compliance Act, better known by its acronym FATCA, was issued by the United States in 2010 and is aimed at tax evasion by American taxpayers. This federal law places some obligations on financial institutions outside the United States that provide services to US citizens, companies, and tax residents.

To fulfil the main requirement of the FATCA — control over the financial accounts of US taxpayers — institutions must:

  • Identify their customers, both US and non-US entities and individuals.
  • Provide the IRS with information about the investments and income of US tax residents. In addition, they gather information about persons who refuse to provide information for identification, as well as about persons not participating in the application of FATCA requirements.

The Act is implemented both through direct agreements between financial institutions and the IRS and agreements between the US and foreign governments.


Sanctions and Anti-Money Laundering Compliance

Sanctions are not a novel issue to deal with for businesses, since screening is a mandatory requirement for quite a long time. And yet, many firms are missing efficient AML/compliance programs that top managers find even more relevant. 

The process is challenging for several reasons:

  • Frequent changes in sanction lists.
  • Various jurisdictions and regulators to deal with.
  • Long-term implications and risks that are difficult to predict.

In addition, new checking objects are constantly being added. Inspections should be carried out not only on third parties but also on employees, management and suppliers of companies — i.e. within the organisations themselves.

Adequate screening software is indispensable to navigating a complex world of sanctions and AML compliance. 

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Frequently asked questions.
What is sanction risk?

In the dynamic area of compliance, it is difficult to evaluate what sanctions mean for businesses. For international companies, it is particularly challenging to manage risk associated with sanctions, and follow regulations on sectoral, domestic and cross-country levels.

Mistakes are very costly for firms, causing serious operational problems or billion-dollar fines. To avoid such risks, firms should have a well-balanced program, which ensures protection at all stages — from detecting and responding to threats, to forecasting upcoming changes.

Why software is needed for sanction screening?

Regulatory agencies in many countries underscore the need for businesses to introduce software and automate sanction compliance procedures. With IT solutions, large volumes of information can be navigated, human error can be eliminated in screening, and documents can be analysed faster and with greater precision. 

For instant sanction check, try LIGA UNITED.

Why are sanction checks important?

Financial crimes become more technologically advanced and sophisticated every year. As a response, regulators take proportionately harsh measures.

Companies must meet their compliance obligations and implement automated systems to take information search to the next level if they want to avoid high fines and business bans.