17th March 2020
Economic Sanctions & AML
What Are Economic Sanctions?
Economic sanctions are instruments of foreign policy that are imposed by countries or international organizations on other countries, or on entities and individuals within those countries. Designed to penalize illegal activities, including financial crimes, humanitarian crimes and terrorism, or to achieve diplomatic objectives, economic sanctions specifically prevent firms and individuals from doing business in, or with, countries named on a sanctions list.
Types of sanctions: Depending on diplomatic and political objectives, economic sanctions may be implemented as:
- Embargoes preventing the provision of goods and services to another country
- Tariffs on imported goods
- Quotas on imports and exports
- Non-tariff barriers, such as licensing or packaging requirements or standards for imports
- Asset freezes on goods and funds
Economic sanctions can be imposed comprehensively, meaning that they target entire countries, or they can be imposed as selective economic sanctions, meaning that they are targeted against individuals, entities or groups. Economic sanctions are devised by governments or international authorities, such as the United Nations Security Council, and enforced by domestic financial authorities. In the United States, for example, sanctions are enforced by the Office of Foreign Assets Control (OFAC).
The complexities of cross-border banking and financial systems and the diversity of global regulatory environments mean that countries and individual criminals are often able to exploit vulnerabilities to launder money and finance terrorist activities. By restricting and preventing business relationships with and within these countries, economic sanctions have become a foundation of anti-money laundering policies in jurisdictions across the world. Accordingly, financial institutions must integrate economic sanctions searches as part of their risk-based anti-money laundering programs: an obligation that requires firms to screen and monitor their customers and transactions.
Noncompliance with economic sanctions may result in fines and criminal charges. In 2019, OFAC issued around $1.29 billion in penalties against 22 firms for sanctions breaches — up from $71.5 million against seven firms in 2018.
Sanctions screening and monitoring can be complex and challenging. While many money launderers use pseudonyms or aliases, it also may be difficult for firms to verify customer identities thanks to duplicate names, missing information or unfamiliar naming conventions. In many cases, sanctions screening can generate false positives and, worse, false negatives, so it is also important that each institution implements a solution that delivers a satisfactory level of compliance performance.
In 2019, OFAC issued a framework to help US firms implement and shape their economic sanctions compliance programs. The document includes guidance on meeting compliance obligations, setting up internal controls and auditing for vulnerabilities. With that in mind, when devising a sanctions program, firms should consider several important principles, including:
- Regular updates: Economic sanctions are issued and withdrawn frequently, so firms should also ensure that their screening and monitoring measures are responsive enough to adapt to those changes.
- Geographic location: Firms should ensure their sanctions screening measures are relevant to the jurisdiction in which they operate and can discern between comprehensive and selective sanctions.
- Data analysis: In order to screen sanctions lists and monitor changes in risk, firms must verify a range of data. Data collection and analysis software must be able to facilitate that process efficiently and accurately to create rich customer profiles.
- Accuracy and fuzzy logic: Screening and monitoring processes must take naming conventions, nicknames and pseudonyms into account when searching sanctions lists. Similarly, screening software should be capable of using fuzzy logic to identify duplicate entries on lists or to fill in gaps of missing data.
Firms must dedicate technology, resources and expertise to their AML and economic sanctions compliance needs, including training staff to manage the growing sanctions burden. Where an in-house compliance program is not possible or prudent, firms should seek third-party support to find a solution that meets their needs and risk profile.