Sanctions are a type of action that the global community takes to respond to international law violations. Such measures may be applied against countries and regimes for human-right abuses, initiation of war and threatening international security. Commonly taken actions include:
- Trade embargo.
- Freezing of financial funds.
- Limitations on importing and exporting, making investments.
- Prohibitions regarding business cooperation with specific countries, companies and personas.
There is much more to a complete listing than just financial sanctions. However, all types of sanctions follow the same objective, which is to change the target’s behaviour by putting significant strain.
As part of imposing sanctions, issuing countries present lists of targeted companies and individuals, and establish fines for noncompliance. Examples include the UK Sanctions List, the United States, Japan and other countries.
Due to the prevalence of financial sanctions worldwide, companies should maintain a reliable compliance program and be aware of the complex geopolitical landscape. Such measures are particularly relevant for banks and financial organisations. What sanctions mean for businesses across the globe, is the need for robust screening and monitoring of potential partners and clients. If this is not done, the company could face penalties and damage its reputation.
Types of Sanctions
Sanctions, by definition, are actions and orders that are given to force a country to follow international laws. International sanctions fall into several categories.
The following section is devoted to formal sanctions — namely, measures that are official and backed up by a normative legal framework.
Financial sanctions are one of the most common penalties. Among other things, they are limiting a target's investing activities and financial resources.
In the UK sanctions system, financial sanctions are regulated by the Office of Financial Sanctions Implementation (OFSI). This institution is a part of HM Treasury, which is intended to clarify, introduce and implement sanctions across the UK.
Economic sanctions imply many kinds of restrictions. Such measures may include a trade embargo (see the section below), freezing of funds, travel and visa bans, etc. Restrictions can be applied against certain persons and organisations, as well as the entire regime or the state.
The aforementioned penalties aim to regulate geopolitical issues by creating economic obstacles.
This category implies a prohibition on trade with a state, such as import- and export limitations, imposing an embargo on a particular group of goods, and increasing tariffs.
UK sanctions are controlled by the Department for International Trade (DIT).
The use of vehicles is limited in some countries. For instance, it is not allowed to own or move aircraft or ships under the flag of the country in a foreign state. Transport sanctions with different variations are now imposed against:
- Russian Federation,
- The Republic of Belarus,
- Democratic People’s Republic of Korea (DPRK),
- and Syria.
Persons categorised in this category are not permitted to travel outside the state where they were sanctioned.
Thus, if a person is under a travel ban in the UK, they are prohibited from entering and moving around the country, including transit. Sanctioned individuals would also not be granted visas, and if in the UK would have to leave the country. The matter is within the purview of the Home Office.
What is a sanction in a diplomatic sense? It is a non-military and non-economic action to demonstrate discontent with a country's actions. Penalties typically involve the severance of diplomatic relations and shutting down embassies.
Sports sanctions are intended to affect the public image of a state — both for its citizens and for the international community. Thus, athletes from sanctioned countries are commonly withdrawn from worldwide competitions, sports events are not held there, etc.
Sanctions against individuals
Politicians and private persons can be sanctioned by the United Nations Security Council. In this case, they will face freezing of financial accounts, travel bans and other types of punishment.
To get the United Nations Security Council Consolidated List, follow the link.
Despite being relatively new, environmental sanctions are quickly taking their place among the most pressing global concerns. They are applied to protect threatened plants and species, in cases of significant environmental damage, etc.
The majority of sanctions do not involve the use of force. Nonetheless, in extreme cases, military sanctions are applied. The problem is solved with military force, by using the army. Limitations can be related to the supply of weapons and ammunition or may take the form of an armed attack.
How Can Sanctions Compliance Risks Be Reduced?
The price of violations is too high for global companies, so they should be sensitive to sanctions obligations. An effective sanction compliance program can protect your company from dubious business relationships. In addition, local and foreign organisations you plan to work with should undergo screening and monitoring. The latter implies gathering data from international and state databases, open sources and media outlets.
Taking into account the volume of information, high-quality analysis requires digital tools. With LIGA UNITED functionality, you will have instant access to worldwide registers and sanction lists. Only key facts are included in the company dossiers so you can quickly decide on cooperation.
Here are some tips for developing an effective sanctions compliance program:
- Convey the importance of a sanction program to a management team, remind them of obligations and legal requirements in your jurisdiction.
- Develop company policy in line with industry requirements, business size and common/anticipated risks.
- Conduct training for employees on organisational policies and screening procedures.
- Ensure policy includes contacts of responsible authorities and officials, and violations are reported promptly.
- Monitor regulatory changes, and due diligence requirements and update company policies accordingly.
- Invite third parties to audit the sanctions compliance program to identify weaknesses in the process.
- Repeat training for staff regularly, since the area of compliance is ever-changing and requires updating of knowledge.
- Find ways to make the program easy to update and agile, and do not wait to introduce it to your organisation.
What Are Exceptions to Sanctions?
Some cases are regarded as exceptions to sanctions measures. This is done to ensure that the restrictions do not affect uninvolved persons and there are no “false positives” in the application of financial sanctions.
Here are some exceptional instances:
- Individuals under immigration sanctions might be allowed to visit a state for humanitarian and charity purposes.
- Sanctioned organisation or an individual might get a permit to follow contractual obligations.
- Diplomatic reasons, i.e. funding and money transfers to embassies, NGOs and international agencies.
- The suspension of the embargo on essential non-military goods.
UK HM Treasury Sanctions
UK sanctions are overseen by HM Treasury.
Like in the aforementioned examples, the UK implements both international and autonomous acts. How do sanctions work in this dual system? Following obligations under the United Nations Security Council, the UK system keeps close ties with the European sanction regimes and shares many financial sanctions targets with the United States.
Businesses are prohibited from cooperating with entities under financial sanctions. Compliance obligations are of top priority for the banking and finance industries.
Additional facts on the UK sanctions regime and exceptions are available here.
UK sanctions and licensing
For trade sanctions
Organisations require a licence to circumvent trade sanctions. Thus, they will be able to conduct trade operations that are usually forbidden. Exceptions to the UK sanctions regime are specified in corresponding regulations.
The issuance of licenses is supervised by several agencies. For example, applications related to imports are overseen by DIT’s Import Licensing Branch. Other trade issues should be discussed with the Export Control Joint Unit in DIT.
Find contacts by the link.
For financial sanctions
UK sanctions policies also have exceptions regarding financial sanctions. The licence may be obtained through HM Treasury, as well as application details and other requirements.
The licensing procedure is mandatory for any sanctioned organisation or individual, who plans financial activities.
For transport sanctions
UK sanctions in transport matters are licensed by the Department of Transport. As for other types of restrictions, the licence allows sanctioned persons and organisations to carry out some transport operations.
For activities prohibited by several measures
Companies and persons may fall under several sanctions categories at once. Under these circumstances, the UK sanction regime requires them to obtain several licenses. Relevant bodies should be contacted separately as well.
As a global organisation for security, the United Nations maintains a list of individuals, companies and regimes involved in illegal activities. The latter includes a proliferation of arms, waging war, terrorism, and other actions threatening international peace.
Countermeasures — such as diplomatic and financial sanctions — aim to affect the international credibility and profits of targeted regimes. Somalia, the Democratic People's Republic of Korea, Iran, and Afghanistan are examples of countries against which UN financial sanctions were adopted.
More information may be found in the UN Consolidated Sanctions List.
The European Union has a complex sanction system, where over forty sanction regimes are enacted simultaneously. The EU follows both sanctions by the United Nations Security Council and domestic acts.
Financial sanctions are an essential tool for the EU government to take action in crises and preserve global security and the rule of law. Verification of sanction compliance is at the discretion of member states. Local authorities are required to establish mechanisms for responding to violations.
US OFAC Sanctions
Sanctions in the US are overseen by the Office of Foreign Assets Control (OFAC). This body by the US Department of Treasury introduces financial sanctions and carries out two listings:
Obligations regarding financial sanctions are mandatory for all US citizens and organisations.
Sanctions are applied in case of significant security threats and serious violations of international norms (persons and entities involved in human and drug trafficking, terrorism, war crimes, etc).
SEMA Canadian Sanctions
Canada has an autonomous sanctions regime alongside UN obligations. The regulatory framework is based on the following acts:
- Special Economic Measures Act 1992 (SEMA)
- the Justice for Victims of Corrupt Foreign Officials Act 2017 (JVCFO).
Canadian financial sanctions are applied against regimes involved in human rights violations, corruption and terrorism. Recent actions were taken concerning the Russian war in Ukraine.
As Canada plays an important role in the geopolitical landscape, its financial sanctions have an impact both on a regional and international level.
Financial Sanctions by China
The trade war with the United States in 2019 caused China to adopt several domestic sanctions acts:
- Unreliable Entity List (UEL), which was enacted in 2020 by the Ministry of Commerce,
- Anti-Foreign Sanctions Law of 2021 forbids Chinese citizens and businesses to follow sanctions by third parties. Chinese companies are therefore not obliged to follow secondary sanctions — mainly financial sanctions by the US.
Japanese Sanctions Under FEFTA
Foreign Exchange and Foreign Trade Act (FEFTA) is a primary piece of legislation, which defines the Japanese sanction regime. It primarily concerns trade issues, but also provides a legal basis to take action against international law violations and global security threats.
North Korea is a major target for Japan’s financial sanctions due to its breaches of nuclear agreements. Japan also joined international steps against the Russian war in Ukraine, by freezing assets of Russia’s Central Bank and targeting individuals linked to the Russian government.
Financial sanctions in Japan are introduced by the Ministry of Finance in conjunction with the Ministry of Economy, Trade, and Industry.
Australian DFAT Sanctions
As in the examples above, Australia has a dual regime consisting of UN and domestic sanctions. In line with international obligations and global security concerns, it keeps an eye on major entities under financial sanctions.
Sanctions are issued by the Department of Foreign Affairs and Trade (DFAT). These obligations are mandatory to all persons and companies under Australian jurisdiction.
How to Do a Sanction Screening?
Financial sanctions are getting more complex every year and require special attention from companies. With multiple sanctions lists in place, with a large flow of customers, the screening process might take a lot of time.
In addition, financial sanctions are constantly updated. Сhanges are happening so fast that monitoring becomes almost impossible without the use of digital tools.
Here are some tips to bring compliance in your organisation to the next level:
- Improve the quality and quantity of your customer data. Screening across multiple jurisdictions can bring fruitful results for your research. For instance, you can simultaneously search for matches in UK sanctions and EU financial sanctions.
- Automate the compliance process with reliable tools. LIGA UNITED analyses thousands of documents in a single click, including Canadian, Japanese and UK sanctions lists. A company's dossier contains concise information for making an informed decision.
- Monitor updates and recent developments in the field. Set up automatic monitoring for relevant sources and get alerts on changes in UK sanctions, and media mentions of your clients and company.