Sanctions are legal impositions authorized by a central body in the form of financial, trade, travel, or civil aviation restrictions.
Sanctions are crucial to Anti-Money Laundering programs as they help prevent financial fraud and ensure compliance with AML laws and regulations. Sanctions are intended to restrict the target entities to influence them and create pressure so that they behave as per the required norms and do not get involved in any illegitimate activity that may result in financial fraud, human rights violations, or damage to the world economy or environment at large.
Essentially, there are five types of sanctions: economic sanctions, environmental sanctions, sports sanctions, diplomatic sanctions, and military sanctions.
Economic sanctions are different types of penalties imposed on target countries, their officials, or their citizens intended to restrict trade and financial transactions to coerce, deter, punish, or charge them if they violate international norms of behavior. In certain cases, these sanctions may also fall under the international sanctions imposed on targeted countries and may involve economic, political, or diplomatic reasons that eventually affect their economic health.
Legal and global authorities impose these sanctions to keep national security interests intact, which are part of their country’s political and economic decisions. Withdrawal of customary trade and financial relations and restrictions to foreign financial institutions are some of the types of sanctions under economic sanctions that are imposed by these bodies.
As the name suggests, diplomatic sanctions are imposed to restrict any country’s diplomatic benefits. These sanctions can take different forms—diplomatic isolation, suspension of diplomatic relations, and expulsion of diplomats. They limit a country’s diplomatic efforts and access to the global community. These sanctioned regimes are governed by international law, which pressures the targeted country to change its behavior.
Military sanctions are political and military trade penalties intended to curb or stop a country’s military intervention by limiting their rights, restricting economic or military relations, and imposing investment restrictions. This reduces a country’s capacity to perform any military-related financial transactions, procure military weapons & military technologies, and also restrict their fly zones, resulting in their reduced capacity for military interventions.
Sportswashing is the process of money laundering in the sports sector. It is not restricted to any specific sport or country. The United Nations Security Council has to impose these sports sanctions when any individual, group, or organization is found legitimizing their illicit funds or wealth using sports events or companies.
Environmental sanctions are imposed against different kinds of environmental crimes, including illegal pollution of soil, water, or trade or illegal shipping of plastic waste abroad that causes severe damage to our environment. The UN Security Council imposes sanctions against environmental offenders through fines, withdrawal of licenses, or bans on access to public funding or closure.
Before sanctions are imposed against any entity, person, or country, there is a thorough process of sanctions screening; it is critical to implement sanctions so they are away from any human rights violations and ensure their decisions will not affect economies. AML agencies focus on increasing their sanctions screening capabilities to reduce the risks of sanctions violations and ensure sanctions programs are followed with due diligence. There are certain steps involved in the screening process that must be followed diligently. These include:
KYC compliance is a mandatory process that all financial institutions or organizations involved in financial transactions with people have to follow in any way. KYC is the process of authenticating the identity of customers and assessing if there are any chances or traces of identity theft, financial fraud, money laundering, or terrorist financing.
Anti-money laundering risk assessment is the process of identifying the risks associated with various illicit activities and finding ways to prevent them. The AML-based risk assessment involves continuous monitoring, reviewing the activities of potential targets, and documentation and reporting of the same to the concerned authorities and legal bodies for further action.
A Suspicious Activity Report (SAR) is an official document that any financial institution or other organizations have to submit to the Financial Crimes Enforcement Network (FinCEN) whenever there is any suspected case of money laundering, financial fraud, or terrorism financing. Once the report is sent to the United Nations Financial Crimes Enforcement Network (FinCEN), a division of the United States Treasury, it will then start its investigation for further course of action.
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Learn how to conduct real-time AML screening of global sanctions and watchlists with our comprehensive guide on sanctions screening.
