Financial crimes pose a significant threat to global security and stability. In response, regulators have introduced various measures to prevent and combat financial crimes. These include sanctions compliance and anti-money laundering (AML) requirements.
While both aim to protect the integrity of the financial system. Nevertheless, they are distinct areas of regulation with some key differences that compliance professionals should understand.
Sanctions Compliance: Enforcing Economic and Trade Restrictions
Sanctions compliance focuses on enforcing economic and trade restrictions imposed by governments or international organizations on specific targets, such as terrorists, human rights violators, or rogue states.
It requires adherence to multiple and often conflicting regimes, such as those of the United Nations, the European Union, and the United States. Sanctions compliance also involves monitoring and reporting any breaches or suspicious activities to the relevant authorities.
Key Differences with AML
- Sanctions compliance applies to specific individuals, entities, countries, or activities that are designated by sanctions authorities. AML applies to any customers or transactions that may be involved in money laundering or terrorist financing.
- Sanctions compliance requires screening customers and transactions against various sanctions lists that are updated frequently and may differ by jurisdiction. AML requires screening customers and transactions against various risk indicators that are based on a risk assessment and may vary by sector, product, or service.
- Sanctions compliance may result in blocking or rejecting customers or transactions that are subject to sanctions. AML may result in reporting or investigating customers or transactions that raise suspicions of money laundering or terrorist financing.
- Sanctions compliance may involve obtaining licenses or exemptions from sanctions authorities to conduct otherwise prohibited activities or transactions. AML may involve obtaining consent or approval from FIUs to conduct certain activities or transactions that are otherwise subject to reporting.
Anti-Money Laundering: Detecting and Preventing Illicit Funds
AML focuses on detecting and preventing the movement of illicit funds derived from criminal activities, such as drug trafficking, fraud, or tax evasion. It requires implementing a risk-based approach to customer due diligence, transaction monitoring, and record-keeping.
AML also involves complying with various reporting obligations, such as suspicious activity reports (SARs), currency transaction reports (CTRs), or foreign account tax compliance act (FATCA) reports.
Key Differences with Sanctions Compliance
- AML applies to any customers or transactions which raise a suspicion of money laundering or terrorist financing, regardless of their origin or nature. By contrast, sanctions compliance applies to specific targets designated by sanctions authorities.
- AML requires screening customers and transactions against various risk indicators. These are based on a risk assessment and may vary by sector, product, or service. Sanctions compliance requires screening against frequently updated sanctions lists, which may differ by jurisdiction.
- AML may result in reporting or investigating customers or transactions that raise suspicions of money laundering or terrorist financing. Sanctions compliance may result in blocking or rejecting customers or transactions that are subject to sanctions.
- AML may involve obtaining consent or approval from FIUs to conduct certain activities or transactions that are otherwise subject to reporting. Sanctions compliance may involve obtaining licenses or exemptions from sanctions authorities to conduct otherwise prohibited activities or transactions.
Understanding the Differences
Sanctions compliance and AML are both essential for financial institutions and other regulated entities to protect their reputation, avoid legal penalties, and contribute to global security and stability.
By understanding the differences between sanctions compliance and AML, compliance professionals can develop a comprehensive compliance program. Such a program can guide financial institutions and other regulated entities to protect their reputation as they trade with each other.
