In order to ensure financial sanctions are observed and enforced, financial institutions are required to consult sanctions lists when conducting business.
What is a Sanctions List?
Financial sanctions are a significant part of the global fight against financial crime and are used by governments all over the world to restrict or prohibit trade with foreign targets which are involved, or suspected of being involved, in illegal activities.
Financial sanctions may be leveled against entire countries, or against individuals and entities. They may also be used against parties not directly engaged in crimes, but which are acting on behalf of others who are doing so. To help businesses determine who is, and who is not, the subject of financial sanctions, governments, and financial authorities issue sanctions lists.
Since sanctions are usually backed by serious civil and criminal penalties, institutions should carefully consider their compliance status, and integrate their use of sanctions lists with the internal systems and controls they put in place to detect and report financial crime.
Given the strict legal implications of breaching sanctions, financial institutions must ensure they understand what sanctions lists are, and how to use them correctly.
Sanctions may be leveled as a result of a illegal activity or to achieve a foreign policy/diplomatic aim. They are normally passed by act of government, or by an international authority: a United Nations Security Council Resolution, for example.
Many sanctions lists include targets involved in the criminal financing of terrorist activities. In the United States of America, for example, the Patriot Act prohibits US businesses from providing ‘material support’ to groups suspected of terrorism, while the UN security council committee enforces legislation such as the Al Qaida and Taliban Order (2006), which serves a similar function. More generally, sanctions listings aim to counter:
- Terrorism and Terrorist financing
- Narcotics trafficking
- Human rights violations
- Weapons proliferation
- Violation of international treaties, e.g arms embargo
- Money laundering activities
Governments and financial authorities around the world maintain a variety of targeted sanctions lists. Examples of sanctions lists include the United States’ Specially Designated Nationals and Blocked Persons (SDN) List, and the consolidated lists used by the United Kingdom, the European Union, and the United Nations. Sanctions lists are generally made available online so that businesses are free to search and consult them prior to entering into a relationship with a foreign person or entity.
Sanctions lists should play an important role in a financial institution’s anti-money laundering (AML) policy – and will significantly affect how, and with who, that institution does business.
While sanctions lists are conceptually straightforward, in practice they involve the processing of huge amounts of data, including not just the names of listed individuals but peripheral details such as known aliases, and geographic location.
Given that many businesses deal regularly with high volumes of clients and transactions, the act of navigating sanctions lists via a risk-based approach, and on a case-by-case basis, represents a significant administrative challenge – or even an impossibility. With this in mind, businesses may incorporate a range of useful screening tools to make the search process much more efficient. When choosing a screening platform, however, compliance requirements should be a priority: AML officers should make sure their platform is regularly scheduled to be updated for relevance and accuracy.
To maintain regulatory compliance, financial institutions must know what to do when they receive a name match on a sanctions list. Establishing the likelihood of a match should be the first step: many individuals use similar names, so false positives are common. Peripheral information, such as geographic location, may be used to establish the accuracy of the match – again, screening providers may prove useful by adding contextual details to searches, and subsequently increasing the efficiency of the resolution process.
Where confidence is high that a correct match has been returned, institutions should contact the relevant financial authority and await instruction.