The New Era (and Challenge) of Targeted Economic Sanctions

Actimize AML Product Team, Anti-Money Laundering

For the past 50 years, the vast majority of economic sanctions were considered to be “broad” sanctions – or sanctions which were brought in force against an entire country’s economy.  But 2014 saw a marked change in how Western governments looked to enact sanction programs against countries. As the global economy grows, it is becoming increasingly problematic to enact broad sanctions against a single country without affecting global economic interests.  Thus targeted sanctions, which factor in the global economic impact of the sanction program, were levied against Cuba, North Korea, and Iran.

Targeted sanctions are instances where countries choose to sanction very specific entities for economic punishment. The Russian sanctions enacted by the US and EU in 2014 are prime examples of this policy strategy.  If broad sanctions had been brought against Russia, then it would have potentially impacted significant portions of the European and American economies. Instead, the governments chose to attack very specific elements of the Russian economy.  Freezing personal assets of some of the most influential Russian leaders; preventing long-term financing to the oil and gas industry; and banning imports and exports from the ports in Crimea are examples of this type of sanction.

From a financial institution (“FI”) perspective, targeted sanctions represent a very complex and detailed problem for compliance officers.  Before, banks could simply review trades or dealings with specific countries.  If a US company was trying to work with Cuba, then you could simply flag the transaction.  Now, however, a compliance department is tasked with knowing who is involved in the transaction and what kind of financial activity is occurring before it can make a judgement on the activity.

One good example of this type of activity, which caused tremendous controversy as well as significant problems for the banks, centered on a company called Gunvor Group Ltd.  Gunvor is one of the largest private oil and commodity traders in the world, and at one time Gennady Timchenko, a Russian billionaire investor and businessman, owned a significant portion of Gunvor. When Mr. Timchenko was sanctioned by the US and EU governments, his ability to work with Gunvor became a significant issue.  Banks spent a tremendous amount of time, sometimes weeks, manually trying to identify, classify, and risk assess their deals with Guvnor.

As a result, Timchenko sold his stake in the company in early 2014 because these sanctions made it difficult for him to operate. (Incidentally, to make it even more interesting, after the WikiLeaks release of US State Department cables in November 2010, it was reported that the wealth of Russian Prime Minister Vladimir Putin was itself linked to the “secretive Swiss-based oil trading firm” called Gunvor.)

As we enter an era of targeted sanctions, what can financial institutions do to make these exercises less arduous over time? The first step is to employ a more robust customer onboarding tool which allows FIs to flag and link customers, corporations, and other entities to each other.  The second step is employ a robust watchlist filtering tool which allows you to rapidly screen and identify the accounts held within the FI.  Additionally, FIs can no longer depend on basic sanction screening at onboarding, and periodic screens thereafter. Watchlist screening needs to become an active, on-demand activity which easily integrates and works with your Know-Your-Customer and customer onboarding programs. In this way, when new targeted sanctions come out in the future, the FI can quickly identify which accounts and trades may be at risk and can eliminate the significant amount of manual work to identify these accounts.

The more interlinked the global economy becomes, the more important it will be for FIs to have these processes in place to properly control their risks and respond to regulatory and government request in a rapid, and more importantly, efficient manner.

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