Sanctions Checks: A Comprehensive Guide for Compliance

Europol estimates that a hefty 2% to 5% of the world’s money gets tangled up in suspicious dealings involving money laundering, causing chaos in global stability and disrupting legitimate business. Activities like corruption destroy the foundations of democracy and peace. There has been a constant need for a standardized system that makes sure every single transaction, performed locally or internationally, is above board.
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Julia Ront, Founder and CEO of Vespia

December 20, 2023

Sanctions checks look at potential partners and customers for any sign of their being involved in illegal activities or financial crime. The many different types of sanctions keep a check on commercial, financial, political, and criminal activities all over the world as more and more businesses go global.

Performing these checks is an important part of anti-money laundering or AML verification because it helps organizations follow certain rules, protect their assets and reputation, and avoid unknowingly falling victim to illegal schemes.

What is a sanction?

The term sanction refers to any of the different types of restrictions and limitations that a government or an international body places on a person, company, or even a nation, often in reaction to their engagement in questionable or immoral behavior.

For instance, the EU placed sanctions on Belarus for violating human rights, among other things. Similarly, the UN Security Council levied economic sanctions on North Korea for utilizing its already scarce resources to conduct excessive nuclear and missile testing. The primary goal of imposing a sanction is to stop or discourage the occurrence of certain illegitimate or criminal behaviors and activities, such as fraud, theft, bribery, terrorism, money laundering, and corruption.

Sanctions are meant to restrict suspicious individuals and entities and prevent them from committing financial crimes and causing serious harm. They do this by limiting the actions that a sanctioned person or entity can perform. They could, for example, prohibit them from partaking in certain financial activities, disallow them from visiting particular regions, or simply freeze their assets, effectively rendering them trapped and helpless. The sanctioned individuals or organizations might themselves be the offenders, or they may have ties to another person or company that has been sanctioned or declared high-risk.

There are several different categories of sanctions, depending on the type and degree of prohibition or limitation. Common types of sanctions include financial, asset freeze, travel, economic, trade, diplomatic, and military penalties.

What are sanction checks?

A sanction check is a screening process that compares the names of potential customers, whether individuals or organizations, against various global sanctions lists. These lists contain the names of persons or entities subject to restrictions or prohibitions due to their involvement in or association with illegitimate or criminal activities.

Organizations dealing with financial transactions or activities, such as banks, brokerages, real estate firms, and cryptocurrency exchanges, are obligated to run sanction checks. These organizations perform anti-money laundering (AML) checks and know-your-customer (KYC) or know-your-business (KYB) verification on each new customer approaching them for business. Sanctions checks are a part of these mandatory compliance checks.

Sanction checks serve several purposes, including properly identifying sanctioned entities, accurately assessing risk levels, predicting and preventing potential crimes of various natures, and ensuring compliance with local or international AML regulations and applicable laws. Additionally, sanctions checks also enable organizations to protect themselves from potential legal and financial trouble by conducting their due diligence. They’ll help you ensure that your organization doesn’t facilitate sanctioned individuals in conducting any transaction or activity that violates any sanction they might be under. The slightest indication of a red flag must be reported to relevant authorities.

Sanction checks in the compliance context

Sanction checks that are part of the AML verification process mainly concern lists related to financial sanctions, asset freezes, travel bans, and such, and not diplomatic, trade, or military sanctions. They are conducted at the initial stage of the AML compliance process and periodically throughout the customer relationship.

Organizations can perform these sanction checks manually by searching customer names against various relevant sanctions lists – an exhausting, error-prone task. Or they can go the digital automated route by using a sanctions screening solution, with access to global databases and regular updates, making the screening process exponentially quicker and more accurate than before. Sanctions screening solutions also provide features such as name matching with fuzzy logic, risk scoring, alert management, and audit trails.

Who has the authority to impose sanctions?

Globally, various governments and private organizations use sanctions as tools to uphold order and address wrongdoing. These entities curate lists – proper official databases – identifying individuals, entities, or countries subject to sanctions due to their involvement in illegitimate or criminal activities. While some regulatory bodies have a more localized influence, others hold authority over much larger regions. Many of these bodies tackle more than one category of sanctions.

Consider the Office of Foreign Assets Control (OFAC), for instance, which is a US government agency administering sanctions against entities posing threats to national security, foreign policy, or the US economy. The Organization of American States (OAS) serves as a regional force promoting democracy, human rights, and development, imposing sanctions on members violating its principles.

Similarly, the Foreign, Commonwealth, and Development Office (FCDO), a UK government department, oversees diplomatic relations and international development. It has the authority to impose sanctions on those engaged in human rights abuses, terrorism, or activities jeopardizing UK national security.

The African Union (AU) contributes to unity and development among African states, utilizing sanctions against members violating fundamental principles like democracy and human rights. The United Nations Security Council (UNSC) holds a global responsibility for maintaining international peace and security and imposing sanctions on entities involved in activities threatening global stability.

The European Union (EU), a political and economic union consisting of 27 countries, upholds values such as democracy, human rights, and social justice. It possesses the capability to levy sanctions on any entity that undermines these values by indulging in repression, terrorism, proliferation of weapons of mass destruction, cyberattacks, and other similar activities.

These diverse organizations collectively contribute to the enforcement of sanctions, addressing various threats and violations on a global scale. Other such organizations include:

  • Bureau of Industry and Security (BIS)
  • Office of Financial Sanctions Implementation (OFSI)
  • Financial Conduct Authority (FCA)
  • Canadian Office of the Superintendent of Financial Institutions (OSFI)
  • Australian Sanctions Office (ASO)
  • Caribbean Community (CARICOM)
  • Association of Southeast Asian Nations (ASEAN)
  • Organization of Islamic Cooperation (OIC)
  • Swiss State Secretariat for Economic Affairs (SECO)
  • Financial Action Task Force (FATF)
  • World Trade Organization (WTO)

Key sanctions lists in different parts of the world

1. United Nations Security Council (UNSC) Consolidated Sanctions List

The United Nations Security Council’s (UNSC) Consolidated Sanctions List is a powerful tool against global threats to peace.

The UNSC Consolidated List targets individuals and organizations engaged in terrorism, weapons proliferation, human rights abuses, or violations of international law. Applicable worldwide, its binding sanctions create a unified front across UN member states, restricting the operations of listed entities globally. Both individuals, such as terrorists, and organizations, such as terrorist groups, face travel bans, asset freezes, and severe restrictions.

Being on the list signifies a serious threat to global security, resulting in reputational damage and severe consequences.

2. OFAC Sanctions List

The US government agency OFAC (Office of Foreign Assets Control) publishes the OFAC sanctions list in order to target threats to US foreign and national security policies.

This sanctions list covers sanctions that cripple the finances of individuals and organizations, such as asset freezes, trade bans, and travel restrictions. It applies globally, limiting transactions or financial systems based on the US dollar and combating financial crime worldwide. The list targets entities ranging from terrorists to drug cartels, causing severe financial and reputational damage and deterring activities against US interests.

The OFAC sanctions list is crucial for protecting national security and financial integrity and requires thorough knowledge to remain compliant with US regulations.

3. OFSI Sanctions List

The OFSI sanctions list comprises individuals and entities facing UK financial sanctions. These include asset freezes, investment bans, and payment prohibitions, based on the severity of the threat.

Applicable in the UK and aligned jurisdictions, the database published by the Office of Financial Sanctions Implementation mentions sanctioned entities involved in activities against UK interests, like terrorism or corruption. Consequences involve legal actions, monetary fines, civil penalties, and criminal prosecutions. The list is a tool to safeguard the national security and foreign policy interests of the UK.

4. SECO Sanctions List

The SECO sanctions list, managed by the Swiss State Secretariat for Economic Affairs (SECO), imposes sanctions on individuals and entities.

Covering asset freezes, travel bans, trade restrictions, or financial prohibitions, the list applies in Switzerland and aligned jurisdictions. Being listed in the database implies involvement in activities against Swiss interests and can lead to legal action, including civil or criminal lawsuits. The severity of sanctions reflects the threat posed by entities on the SECO list to Switzerland’s national security and foreign policy.

5. Australian Department of Foreign Affairs and Trade (DFAT) Sanctions List

The Australian government issues the DFAT sanctions list under its sanctions laws, targeting individuals and entities posing threats to national security or foreign policy interests. This includes financial sanctions like asset freezes, travel bans, or payment prohibitions.

Applicable in Australia and aligned jurisdictions, those listed may face serious legal action, emphasizing stringent consequences for hurting Australia’s interests.

6. Japanese Ministry of Finance (MOF) Sanctions List

Japan issues the MOF sanctions list under its Foreign Exchange and Foreign Trade Law. It enforces sanctions like asset freezes, trade bans, or travel restrictions on those jeopardizing Japanese national security or foreign policy interests.

Applicable in Japan and globally, all entities engaging with Japan must respect the MOF sanctions list. Listed individuals and entities can face legal consequences, criminal charges, and severe penalties.

7. Hong Kong Monetary Authority (HKMA) Sanctions List

The HKMA sanctions list, issued under Hong Kong’s Anti-Money Laundering and Counter-Financing of Terrorism Ordinance, enforces sanctions like asset freezes, travel bans, trade restrictions, and financial prohibitions. It targets individuals and entities engaged in or supporting money laundering or terrorist financing activities. The list is applicable in Hong Kong and aligned jurisdictions.

How to efficiently check individuals against sanction lists

Checking individuals against sanction lists is a crucial part of compliance and risk management for any organization that deals with financial transactions or activities. However, doing it manually is a problem, as it is impossible to keep track of all the sanctions lists and updates; it is slow to search and verify each name; it is inaccurate due to human errors or outdated information; and it results in a poor customer experience due to delays and inconvenience.

Therefore, the solution is to use a digital verification process that is automated and streamlined and can provide fast results. A reliable screening platform should allow bulk processing or, even better, ongoing monitoring of customers and their transactions. A digital solution can access databases that are updated in real-time and use advanced algorithms and artificial intelligence to match names and identify risks, thus reducing the chances of error and increasing efficiency.

That’s not all; there are some other best practices you should adopt. For example, it is important to choose a tool that is easily integrated with your existing systems so that you can seamlessly incorporate the sanction checks into your workflow and customer journey. It is also important to run other essential checks alongside the sanctions checks, such as politically exposed persons (PEP), relatives or close associates (RCA), adverse media checks, and transaction screening, for the best possible risk assessment and mitigation.

It’s critical to select a safe, scalable, and cost-efficient solution that satisfies all applicable legal and regulatory requirements and offers comprehensive analytical, reporting, and auditing capabilities along with global coverage. Ultimately, you must make sure to minimize false positives – occurrences in which an individual or organization is mistakenly picked up as a sanctioned entity due to inaccurate name matching – as they may result in needless expenses, delays, and unhappy or offended clients.

Conclusion

As a vital component in the broader global effort to combat financial crime, sanctions checks play a pivotal role in maintaining a compliant and secure financial environment. By diligently cross-referencing customer data against sanctions lists from local and international authoritative bodies like the UN, FATF, OFAC, and DFAT, businesses can proactively avoid associating with or serving sanctioned parties.

Given the ever-changing landscape of sanctions and anti-money laundering regulations, staying up-to-date with the latest sanctions lists is crucial for effective screening processes. Thus, it is necessary to choose the right sanction checks partner and maximize the benefits gained from an integrated solution.

To get a free test drive on Vespia’s sanctions screening solution, sign up here: https://vespia.io/get-started

FAQs

What is sanction screening or sanction check?

Sanctions screening is an important compliance step that checks people and businesses against global lists to make sure everyone follows certain rules. It prevents banks and other regulated organizations from dealing with individuals or groups identified by governments and global organizations for offenses like terrorism financing, money laundering, or human rights violations.

Who compiles these sanctions lists?

Various international organizations and countries, like the UN Security Council, the EU, and the United States OFAC, create and manage these lists. The lists point out people and organizations facing sanctions because of their involvement in actions that threaten national security, foreign policy, or international rules.

Does only a politically exposed person go through sanction screening?

No – to put it simply, everyone looking to do anything money-related needs to go through sanction screening. Even though important people might face more intense checks because of the extra risk factor, all customers and transactions must be screened against sanctions lists to follow the rules and reduce risks.

How does a sanctions check prevent money laundering?

Sanction screening helps break the financial ties between people and groups involved in money laundering. Blocking their access to the money system and resources makes it tough for them to hide, move, or make illegal funds look legal. This not only keeps the local financial system secure but also helps create a safer global financial landscape by creating regulated businesses and regulated industries.

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