What are Sanctions?

Posted in Sanctions Compliance on March 19, 2024
What Are Sanctions? - Featured Image

What are Sanctions? Essentially, economic sanctions are commercial and financial penalties applied by one or more countries against a targeted self-governing state, group, or individual. Economic sanctions are not necessarily imposed because of economic circumstances—they may also be imposed for various political, military, and social issues. They can be used for achieving domestic and international purposes.

Sanctions can range from travel bans or export/import restrictions to asset seizures. These sanctions apply to organizations or firms not readily subject to law enforcement by the sanctioning jurisdiction. At times, sanctions can also be a blunt and ineffective policy tool, providing insufficient costs or drawbacks to the targeted governments.

What Are Sanctions

Purpose of Sanctions

Economic sanctions aim to prevent escalation of or settle conflicts, counter-terrorism, and human rights violations and prevent nuclear proliferation. Individuals or organizations must impose sanctions on targeted countries or individuals to prevent such illicit activities.

Activities that should end up with sanctions include:

  • Money Laundering
  • Terrorism or Terrorist Financing
  • Drug Trafficking
  • Human Rights Violations
  • Arms Proliferation
  • Violation of internal treaties

Is It Effective?

Most of the time, sanctions are effective. The impacts of sanctions on listed individuals or countries can be very severe. However, the general effectiveness of economic sanctions is uncertain because it is very difficult to measure what sanctions should be imposed. A recent study about sanctions shows that economic sanctions result in meaningful behavioral change in the targeted individuals or countries about 40% of the time.

UN/EU Implementing Sanctions

Multiple national governments and international bodies such as the United Nations and European Union have imposed economic sanctions to deter, punish, or shame countries or entities that endanger their interests or violate international norms of behavior. Sanctions have been used to advance a range of foreign policy goals, including counterterrorism, counter-narcotics, nonproliferation, democracy and human rights promotion, conflict resolution, and cybersecurity.

What Are Sanctions?

Varieties Of Sanctions

In practice, sanctions can take a variety of forms, including travel bans, asset freezes, arms embargoes, capital restraints, and foreign aid reductions. In addition, economic sanctions may also include various forms of trade barriers, tariffs, and restrictions on financial transactions. An embargo is similar but usually implies a more severe sanction, often with a direct no-fly zone or naval blockade.

Economic sanctions can be forced independently by a single country or multilaterally by international organizations. Sanction measures include:

  • Trade sanctions – This sanction measure includes import controls for specific countries, regions or industries.
  • Travel restrictions – Officials, private citizens, and immediate family members may be denied travel access due to sanctioning jurisdictions.
  • Export controls – bar the supply of certain products, services, and intellectual properties to targeted countries or governments. Most restrictions include the sales of weapons and technology for military purposes.
  • Asset seizures – assets can be seized or frozen within sanctioning jurisdiction, which prevents sales or withdrawal.
  • Embargoes – a broad ban on trading with a country, although it can sometimes include exceptions for food and medicine supply.
  • Capital controls – restriction of investments in targeted countries and industries, or broadly block access to international capital markets for country’s issuers.

Sanctions As Response To Crises

Sanctions, while a form of intervention, are generally viewed as a lower-cost, lower-risk course of action between diplomacy and war. Policymakers may consider sanctions as a response to foreign crises in which the national interest is less than vital or military action is not feasible. On occasion, leaders have issued sanctions while evaluating more punitive action.

For example, the UN Security Council imposed comprehensive sanctions against Iraq just four days after Saddam Hussein’s invasion of Kuwait in August 1990. The Security Council did not authorize using military force until months later. Since 9/11, there has been a pronounced shift toward targeted or so-called smart sanctions, which aim to minimize the suffering of innocent civilians.

The level of success that sanctions provide can be measured by the achievement of the desired policy goal or simply the cost to the targeted parties, countries, or individuals. If the main goal is to change the behavior of targeted individuals or countries, their incentives and options will mostly matter at least as much as the sanctioning power’s leverage.

Sanction Examples

The United States of America and the European Union pressed sanctions on Russian officials, industries, and companies that followed Russia’s annexation of Crimea in 2014 and again in 2022 when a full-scale invasion of Ukraine was launched.

The United Kingdom has also imposed an export ban on dual-use goods items with both civilian and military purposes, and the United States of America and the European Union against Russia.

The United States of America, the European Union, and the United Kingdom have together sanctioned over one thousand Russian individuals and businesses, including wealthy business leaders, commonly known as oligarchs, who are considered close to the Kremlin. FC owner Roman Abramovich is one of the high-profile oligarchs sanctioned by the United Kingdom.

The assets belonging to Russian President Vladimir Putin and his foreign minister Sergei Lavrov are being frozen in the United Kingdom, European Union, United States of America, and Canada. But the vast majority of the Russian oligarchs have put their properties and wealth under different names, which means they may be beyond the reach of the United Kingdom’s sanctions.

Another example is when the United States of America restricted imports from China’s Xinjiang region for human rights abuses committed against Uighurs.

Final Thoughts

Basically, sanctions are commercial and financial penalties applied by one or more countries against a targeted self-governing state, group, organization, or individual. This article answers the question, ‘What are Sanctions?’ and how these are relevant to CDD and KYC procedures.