It is important to understand how to identify the various categories and types of sanctions. The meanings of words are important for an appropriate, proportionate, effective, and efficient sanctions risk management and compliance framework.
Types of Sanctions
Essentially, there are five types of sanctions. There are economic sanctions, diplomatic sanctions, military sanctions, sports sanctions, and sanctions on the environment. For the purpose of the learning objectives of this lesson, we will focus on economic sanctions.
Economic sanctions comprise financial sanctions and trade sanctions to break it further down. Economic sanctions are intended to impact targets in two primary ways. First of all, imposing trade sanctions is intended to limit the target country’s exports or restrict its imports. And secondly, they are meant to impede financing, including financial aid.
Trade Sanctions or Embargoes
Now, the first element of economic sanctions is the so-called trade sanctions or embargoes. Embargoes are trade sanctions that intend to limit the targeted country’s imports and exports. Trade sanctions in the form of limits on a country’s exports aim reduce its foreign sales and its foreign exchange.
Trade sanctions in the form of limits on a country’s imports (or the sanctioning country’s exports to the target country) aim to deny the targeted country critical goods. When the sanctioning country exports a large percentage of total global output, the imposition of export restrictions may cause higher prices for alternative sources and goods.
Total trade embargoes are rarer because of their unintended consequences to the citizenry of a targeted country. Most trade sanctions are selective targeting, for example, energy, gas, finance, or luxury goods. Moreover, in most cases, the trade is only diverted. Trade sanctions also rarely impact the political elite, and their impact is generally diffused throughout the entire population of the country.
Transshipment of goods is shipped through intermediate countries before the goods’ final destination. It can become risky as these intermediate countries might be sanctioned, as in the case of shipping goods through a port of Iran before landing in Afghanistan. Sanctions regimes may also specifically prohibit the transshipment of goods.
Understanding the geographic scope of sanctions is vital to ensuring that customer due diligence and ongoing monitoring are conducted correctly. The wide reach of the restrictions imposed by the US and the EU means that steps must be taken to clearly understand the geographic links a customer might have in terms of their citizenship, residency, place of registration and operation, and the location of related or subsidiary entities.
Trade restrictions can have multiple geographic connections. For this reason, understanding the restrictions that might apply to each connection is critical to ensuring that possible sanctions risks are identified before a business deal is made.
Arms embargoes are a specific type of embargo that only applies to weapons and dual-use goods, which are goods that can be used for both civilian and military purposes.
The Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies, or the Wassenaar Arrangement, currently includes over 40 states that have committed to greater responsibility and transparency in the exports of weapons and dual-use goods. The core objective of the Wassenaar Arrangement is to provide information to members on those entities whose applications for export licenses for providing certain goods were denied.
For conventional weapons, members voluntarily report information every six months. The Wassenaar Arrangement breaks the reporting into tiers for dual-use goods and other sensitive items. For tier 1 items, which are “basic items,” the members agree to voluntarily provide information on those proposed export licenses denied to non-Wassenaar members twice per year. For tier 2 items, the Wassenaar Arrangement requests members to notify the Wassenaar Secretariat when an export license is denied to non-Wassenaar members on proposed transfers.
Additionally, members are to report to the Wassenaar Secretariat any export license approvals of “essentially identical” transactions that another member has previously denied. The Wassenaar Arrangement also assists members in controlling arms exports and preventing arms from being acquired by terrorist groups.
Now let’s speak about financial sanctions. Financial sanctions may come in many forms. Governments may impose financial sanctions by prohibiting government and intergovernmental loans to targeted countries. They may also interrupt their commercial finance by labeling them as non-cooperative or of primary money laundering concern.
It hurts the economy by causing the target country to pay higher interest rates and drying up their funding, as creditors avoid the additional credit risk or the risk of being sanctioned themselves. Financial sanctions may also come in the form of asset freezing.
For asset freezes, the assets of a sanctioned target are required to be held or “frozen,” and the sanctioned target cannot access or use them. It comes most often in the form of frozen or blocked bank accounts, which are more commonly called in the US. In contrast to trade sanctions, financial sanctions are more difficult to avoid, especially given the interconnectivity of the global payment systems.
Financial sanctions are also more likely to impact the targeted individual or individuals instead of being diffused through the population. These sanctions take money out of the targeted countries’ government officials’ pockets and deter funding for “pet projects.” Financial sanctions also impact trade, as financial institutions are less likely to engage in trade finance. Thus, trade can be impacted without trade sanctions being explicitly imposed.
Sanctions are commercial and financial penalties imposed by one or more countries against a specific self-governing state, group, or individual. Sanctions are not always imposed for economic reasons; they can also be imposed for political, military, or social reasons. Sanctions can be used to accomplish both domestic and international goals.
We would be interested to have a presentation by Financial Crime Academy at our forthcoming 11th AML/Compliance Conference on 9 December. https://baceeconference.com/11th-aml-conference/
It will be a hybrid event with 300+ expected attendees, mostly online