What are Sanctions? How do Sanctions work?

Posted in Sanctions Compliance on December 4, 2023
What Are Sanctions?

What are sanctions? A sanction is a restriction, depending upon the context, imposed by a regulatory authority or state, to control the economic and financial conditions, and to avoid the risk of criminal activities. Sanctions are of different types including economic sanctions, financial sanctions, etc.

What Are Sanctions?

What are Sanctions?

The conventional wisdom on sanctions is based on a misleading interpretation of how they work. The vast majority of observers would expect sanctions to change the behavior of targets by inflicting material pain that would force them to change their policies – the so-called ‘pain-gain’ equation’. Sanctions influence targets not only by coercing but also by constraining and signaling them. Sanctions could be the last step that aims at weakening a target when the parties have incompatible objectives, for instance in the case of Iran as well as members of al-Qaeda placed on the EU sanctions list.

At the same time, the decision of the council could have been inspired by a more nuanced view of the world than that suggested by the ‘pain-gain’ principle and assumed that imposing a heavy toll on citizens could undermine the strategic objectives of the EU, as has happened in the case of sanctions against Uzbekistan. Additionally, the importance of the signaling dimension of sanctions should not be underestimated.

The act of imposing sanctions is perceived as making a strong foreign policy statement and this can be of use both domestically, targeting an audience calling for action, and externally, projecting a certain image of the EU abroad and sending specific messages to other actors as well.

When used effectively, sanctions can disrupt, deter, and prevent actions that undermine U.S. national security. However, the United States now faces new, emerging challenges to the efficacy of sanctions as a national security tool: cybercriminals; strategic economic competitors; and a workforce and technical infrastructure under pressure from growing financial complexity and competing demands from policymakers, market participants, and others.

To ensure sanctions continue to support U.S. national security objectives, the U.S. government must adapt and modernize the underlying operational architecture by which sanctions are deployed. These changes are also needed to keep pace with the evolution of the global financial architecture, which has a profound impact on the efficacy of U.S. financial sanctions. American adversaries and some allies are already reducing their use of the U.S. dollar and their exposure to the U.S. financial system more broadly in cross-border transactions. While such changes have multiple causes beyond U.S. financial sanctions, we must be mindful of the risk that these trends could erode the effectiveness of our sanctions. 

What Are Sanctions?

In addition, technological innovations such as digital currencies, alternative payment platforms, and new ways of hiding cross-border transactions all potentially reduce the efficacy of American sanctions. These technologies offer malign actors opportunities to hold and transfer funds outside the traditional dollar-based financial system. They also empower our adversaries seeking to build new financial and payment systems intended to diminish the dollar’s global role. We are mindful of the risk that, if left unchecked, these digital assets and payment systems could harm the efficacy of our sanctions.

Final Thoughts

Sanctions are coercive measures that can be used against states’ diplomatic, economic, and cultural relations. Non-military sanctions are typically imposed by one state against another (unilateral sanctions) or by an international organization, such as the United Nations (collective sanctions). Historically, measures have ranged from broad sanctions to more targeted prohibitions on trade in specific items such as arms, timber, or diamonds.

Some sanctions have restricted specific activities deemed beneficial to a target, such as diplomatic, sporting, and cultural relations, as well as travel. They have also targeted specific individuals and groups who pose a risk to peace and security, such as political elites, rebel groups, and terrorist organizations.