Sanctions are economic and trade restrictions imposed by governments or international organizations to achieve foreign policy or national security objectives. Sanctions compliance is the process of ensuring that businesses do not violate any applicable sanctions. Naturally, this would apply in their operations, transactions or relationships.
What are sanctions and why do they matter?
Sanctions are restrictive measures that aim to coerce, deter or punish a target for behavior or actions which the sanctioning authority deems unacceptable or threatening . Accordingly, they can target specific individuals, entities, sectors, countries or regions, and can take various forms. These include:
- Asset freezes: blocking or seizing the assets or funds of designated parties
- Travel bans: prohibiting or restricting the entry or transit of designated parties
- Trade restrictions: prohibiting or limiting the export, import, transit or provision of goods, services or technology to or from designated parties
- Financial prohibitions: prohibiting or limiting the access to financial services, markets, or transactions by designated parties
Why do sanctions matter to global businesses?
Sanctions matter for businesses because they can have significant implications for their operations, transactions, reputation and profitability. Thus, businesses that violate sanctions can face serious consequences. Examples include:
- Legal penalties: fines, forfeitures, injunctions, criminal charges or imprisonment
- Regulatory penalties: license revocations, suspensions, or restrictions
- Reputational damage: loss of trust, credibility, goodwill, or market share
- Operational disruption: delays, cancellations, losses or seizures of goods, services, or funds
- Financial losses: reduced revenues, increased costs, litigation expenses or compensation claims
How can global businesses comply with sanctions?
Importantly, sanctions compliance is not a one-size-fits-all solution, but rather a tailored and proportionate response to the specific risks and challenges that each business faces. However, some common elements of an effective sanctions compliance program include:
- Clear and comprehensive sanctions policy that defines the scope, objectives, roles and responsibilities of the sanctions compliance function within the business.
- Regular and robust sanctions risk assessment that identifies and evaluates the potential exposure of the business to sanctioned parties, countries, sectors or activities.
- Thorough and ongoing sanctions screening and due diligence process that verifies the identity and status of customers, suppliers, partners, employees and other third parties against relevant sanctions lists and databases.
- Reliable and updated sanctions data source that provides accurate and timely information on sanctions legislation, updates, guidance and best practices across different jurisdictions.
- Well-trained and informed staff that understands the importance of sanctions compliance and how to apply it in their daily work.
- Strong and independent audit and testing function that monitors and evaluates the effectiveness of the sanctions compliance program and identifies areas for improvement
- Transparent and consistent reporting mechanism that records and communicates any sanctions issues to senior management, regulators or other stakeholders.
Sanctions compliance is a vital part of doing business in the global market. Businesses that fail to comply with sanctions can face serious legal, financial and reputational consequences. Businesses that comply with sanctions can gain a competitive edge, enhance their reputation and contribute to global peace and security.