December 2010, a fruit seller in Tunisia had his scale stolen yet again by police. Weary of the abuse and the bribes demanded by corrupt officials, he set himself on fire. This fire has now spread across North Africa and the Middle East. The world watched in awe as thousands rose up to confront the leaders of oppressive regimes. Switzerland, the United Nations, the USA and several other countries imposed sanctions to help support those driving change. The Arab League appealed to the UN for a “no-fly zone” over Libya and froze Libya’s membership. The world is experiencing “a wave of great revolutions that would change the course of history” said Alain Juppé before the UN voted in favour of the “no fly-zone” sanction, 17 March 2011. But exactly what are sanctions, how do they work and what must organisations do to ensure compliance? 

Sanctions are enforcement measures taken by a country or group of countries to maintain or restore peace and security. These sanctions are intended to apply pressure on a country, person or organisation to comply with international law or codes of conduct without resorting to the use of force. They can take the form of political, economic or military measures such as limiting diplomatic contact, prohibiting travel, freezing assets and restricting weapons. 

The UNSC, established in 1946, is charged with the maintenance of international peace and security. The Council’s powers include the establishment of peacekeeping operations, the establishment of international sanctions, and the authorisation of military action. Its powers are exercised through resolutions. There are 15 members of the Security Council, consisting of five veto-wielding permanent members (China, France, Russia, the United Kingdom and the United States) and 10 elected non-permanent members with two-year terms. Resolutions by the Security Council are legally binding for all 192 member countries, if they are made under Chapter VII (Action with Respect to Threats to the Peace, Breaches of the Peace, and Acts of Aggression) of the Charter.

The European Union may also issue sanctions to be adopted by its 27 members. UN and EU member nations adopt these sanctions and may even extend their scope to include additional entities or restrictive measures to protect their national security. For instance, the Office of Foreign Assets Control of the US Department of the Treasury enforces sanctions against countries and regimes, terrorists and other entities that pose threats to the USA.

Many of the sanctions are based on international mandates such those issued by the UN. OFAC, established in 1940, played an important role in World War II by introducing sanctions against German businesses and ensuring that German companies could not use the resources of occupied countries in transactions with Americans. Today, OFAC requires American individuals doing business with foreign entities to ensure that their partners are not on OFAC's list of sanctioned countries or organisations. The OFAC Specially Designated Nationals list includes the names of individuals and organisations identified by various sanctions programs including those with ties to terrorist groups, arms trading and narcotics trafficking networks. Violating the sanction may result in fines from $50,000 to $10 million and up to 30 years imprisonment.

How do they work? 

“Apply economic sanctions peacefully, silently and effectively, and there will be no need for war.”
Woodrow Wilson, 1919

In principle, sanctions are a peaceful alternative to war. Because of their potential impact, sanctions are a measure of last resort. Multilateral, comprehensive, economic sanctions can significantly impede a country’s ability to govern and to provide for its civilians as many countries in today’s global economy depend on international trade. In the past, comprehensive sanctions against entire countries have been criticised for impacting those most vulnerable, the young and the poor.

In 1998, former UN Humanitarian Coordinator in Iraq Denis Halliday estimated that "two hundred thirty-nine thousand children five years old and under" had died due the sanctions against Iraq. In 2001, in an effort to prevent the unintended consequences of sanctions on innocent civilians, the Swiss, in cooperation with the UN, released a report outlining “instruments of targeted financial sanctions”. This approach targets sanctions at specific individuals and organisations versus entire countries.  

Unlike the 1990 Iraq sanctions, the 2011 UNSC Libyan resolutions are not comprehensive economic sanctions. Instead, the sanctions specify over thirty entities to which a travel ban or asset freeze applies. These include Muammar Qadhafi, his sons and individuals and companies supportive of his regime including the Central Bank of Libya. To date, the USA has frozen over $30 billion in assets controlled by Qadhafi and his family, the single largest seizure of foreign funds in American history. Switzerland has similarly frozen the assets of Qadhafi, Mubarak and Ben Ali.

Are they effective?

Governments, organisations, including the UN itself, and academics around the globe provide arguments for both sides of the debate. Evidence suggests sanctions influenced positive changes in South Africa and Rhodesia. Evidence also suggests sanctions in North Korea and Iraq have not yielded positive results but have increased the isolation and poverty of innocent civilians.  

Several countries including Australia, Canada, the US and the EU have sanctions against Burma/Myanmar due to human rights violations. While some of the sanctions have been in place for many years, the military junta remains in power and the citizens remain in poverty. “The great majority of Burmese, who are working in agriculture, are not affected at all,” said Aung San Suu Kyi, leader of Burma’s opposition, of sanctions in a recent interview. Suu Kyi continues to support sanctions against Burma despite being freed in 2010 after seven years of house arrest. Similarly, in recent months hundreds of Libyans living abroad have joined rallies around the world in support of sanctions against Libya.

Despite their flaws, one simple but significant value of sanctions remains. It is the principle of the sanction itself. It identifies an abhorrent act and creates a vehicle by which the global community can stand against it. It stands with those fighting, those victimized and oppressed and in acknowledging their struggle, fuels moral support. In a recent interview with PBS, Mikheil Saakashvili, President of Georgia, speaking from his personal experience during the conflict between Russia and Georgia stated, “When we talk about people who are trying, fighting for their survival, … never underestimate. People talk a lot about arms and bombing, et cetera. Never underestimate the power of moral support.” 

How do sanctions impact my organisation?

Sanctions impact many organisations and professionals beyond the banking sector. Securities, insurance and money services firms, shipping companies, importers/exporters, casinos, and professionals such as lawyers and accountants must all be aware of sanctions that may impact their organisations. In fact, all citizens must comply with their jurisdictional sanctions. In the case of OFAC regulations, all US citizens and permanent resident aliens regardless of where they are located, all persons and entities within the United States, all US-incorporated entities and their foreign branches must comply. In the cases of certain programmes, such as those regarding Cuba and North Korea, all foreign subsidiaries owned or controlled by US companies must also comply. Certain programmes also require foreign persons in possession of US origin goods to comply.

Violating sanctions lists can result in business closures, significant fines and reputational damage. In recent years the enforcement of sanctions lists has increased, as have the penalties: 

• August 2010, the US Justice Department fined Barclays Bank $298 million for dealings that violated US sanctions with Cuba, Burma, Iran and Sudan between 2002 and 2007. 
• June 2010, the United Arab Emirates closed down 40 international and local firms as part of a crackdown on companies that violate UN sanctions on Iran.  
• January 2009, Lloyds paid the US authorities $350 million for helping clients avoid sanctions against Iran, Sudan and Libya between 1995 and 2007. 
• December 2009, Credit Suisse agreed to pay a record $536 million fine for violating US sanctions by hiding clients’ identities in order to move millions on their behalf. 

In order to mitigate the risk of fines and reputational damage, organisations must ensure they are aware of sanctions that apply to their jurisdictions. They must also stay abreast of any changes to these sanctions by continuously monitoring the relevant sources. 

How do I ensure my organisation is compliant?

An organisation is responsible for ensuring that the individuals, organisations and countries they do business with do not appear on sanctions list applicable to their jurisdiction. This includes screening new clients and monitoring transactions of existing clients. 

Sanctions lists can include thousands and thousands of names in multiple languages, many having multiple aliases. For instance, the current Canadian OSFI lists, EU Financial Sanctions Consolidated List, the UK HM Treasury Financial Sanctions List, the US OFAC SDN List and the UNSC sanctions lists all contain over 2000 entities each with some well over 4000. Furthermore, the UNSC alone currently has sanctions against a dozen countries. Monitoring these and other sanctions can present a formidable challenge. Fortunately, solutions are available to help organisations manage this challenge. Here are some important criteria to consider when evaluating the various solutions currently available:

Comprehensive intelligence: In order to meet compliance requirements related to sanctions, Know Your Customer, Anti-money Laundering and Politically Exposed Persons, an organisation requires a comprehensive range of Open Source Intelligence. Ensure solutions assess the tens of thousands of names currently listed in global sanctions and watch-lists, the hundreds of thousands of names on international, federal, state and municipal enforcement lists from police, judicial and regulatory agencies.

Look for solutions that provide integrated news media, trade journals and industry publications that have been automatically and intelligently screened for information relevant to compliance. Select a solution with a large, broad base of profiles, important for PEP and KYC analysis. Country risk profiles that can be readily accessed as part of the due diligence process are another important feature that can help mitigate risk.

Real time, accurate information: Sanctions and enforcement list change continuously so having the right information as soon as it is available is critical in compliance. Systems that load information automatically versus having it entered manually eliminate data entry errors and delays. Solutions that continuously monitor Open Source Intelligence sources and immediately update any changes ensure organisations are working with the most current information when assessing a potential business transaction. 

Intelligent name matching: Sanction and enforcements lists contain hundreds of thousands of names. These names can often have multiple aliases, and due to transliteration, multiple spellings. For instance, the current OFAC SDN list includes twelve different variations of Muammar Qadhafi. To ensure a query is exhaustive, yet eliminates false positives, look for a solution that uses the latest computational linguistics technology. Many solutions leverage simple phonetic approaches that have limited capability to process non-Latin scripts such as Arabic, Asian and Cyrillic names. Algorithms combining transliteration, phonetics and alphabet-aware mappings provide more accurate results and far fewer false positives.

Streamlined workflow and reporting: Look for solutions that enable users to review name matches and permanently store their analysis and screening activity. This feature not only enhances the review process but also provides a verifiable, auditable trail that is now required by more and more auditors. Some solutions will also automatically scan a customer’s database against the latest changes to sanctions and enforcement lists and provide users with a list of potential matches. 

In the last few months many countries such as Canada, the US and the UAE have recommended companies be “very vigilant” and exercise “enhanced due diligence” on all transactions involving sanctioned countries and entities. Due diligence must remain vigorous as activity related to these sanctions and others will only continue over the next several months and beyond as entities try to transfer or liquidate global assets. 

Organisations cannot afford to be caught unaware of sanctions and their business impact. As the complexity and frequency of targeted sanctions increase so does the prevalence and severity of penalties by governments and enforcement agencies worldwide. Faced with mounting compliance challenges businesses and professionals must invest in strategies, systems and staff to meet the global sanctions and compliance requirements or risk reputational damage, severe fines and criminal charges.