How sanctions work

Sanctions screening is the one compliance control where a single missed match can be a violation in itself, whatever the amount and whatever the intent. Anti-money-laundering controls ask whether activity is suspicious; sanctions ask whether a prohibited person, entity or place is involved at all. A compliance officer who understands where sanctions come from, what they prohibit and whom they cover can design screening that is proportionate rather than blind or paralyzed.

Sanctions versus AML/CFT

Both disciplines draw on the same customer and transaction data, but they work differently.

The FATF bridges the two. Recommendation 6 requires countries to implement targeted financial sanctions related to terrorism and terrorist financing, and Recommendation 7 does the same for the financing of proliferation of weapons of mass destruction. Both expect freezing without delay, which the FATF Glossary defines, for UN designations, as ideally within a matter of hours. Recommendation 15 brings crypto inside these duties: virtual assets count as "funds or other assets", and through INR.15 the requirements of Recommendation 16, including taking freezing action and prohibiting transactions with designated persons, apply to virtual asset transfers.

UN Security Council sanctions: the global baseline

The UN Security Council imposes sanctions under Chapter VII of the UN Charter. Article 41 allows it to decide on measures not involving armed force, and Article 25 obliges every UN member state to accept and carry out its decisions. A Council sanctions resolution is therefore binding in all member states, which makes it the only truly global layer of sanctions law. Since 1966 the Council has created some 30 regimes; the number active at any time changes as regimes end or begin.

Most regimes have a sanctions committee, made up of the 15 Council members, that adds and removes names, handles exemptions and publishes guidance. Many committees are supported by a panel of experts or a monitoring team that investigates evasion. Regimes fall into three broad families:

• counter-terrorism, such as the ISIL (Da'esh) and Al-Qaida regime that grew out of resolution 1267 (1999), and the Taliban regime under resolution 1988 (2011);
• non-proliferation, such as the regime on the Democratic People's Republic of Korea (DPRK) under resolution 1718 (2006);
• conflict-related regimes for specific countries or regions.

Everyone designated by any committee appears on the UN Security Council Consolidated List, published in machine-readable formats. Each entry has a permanent reference number, names and aliases, and identifiers such as date of birth, nationality and passport details. Resolution 1373 (2001) adds a second route: it requires countries to freeze the funds of persons who commit or attempt terrorist acts, which in practice means designating them under national procedures, so national terrorist lists built under that mandate are part of the UN baseline too.

UN resolutions are not self-executing in most legal systems. Each country gives them effect through its own law, and FATF assessors check how quickly that happens. A gap of days between a UN listing and national effect is a known evasion window, so a well-run firm screens against the UN list directly, not only against its national transposition.

Autonomous regimes

Many countries and regional organizations also impose autonomous sanctions: measures adopted under their own law without a Security Council decision. These may target the same persons as the UN, go further against the same country, or address issues the Council has not acted on, such as malicious cyber activity, human rights abuses or corruption.

Autonomous regimes differ in whom they bind (nationals, residents, locally incorporated companies, transactions in their currency or passing through their territory), what they prohibit and how they define ownership. The European Union and the United States, for example, word their ownership tests and reach differently, so the same customer can be prohibited under one and permitted under the other.

A crypto business therefore needs a documented decision on which regimes it applies. The usual inputs are:

1. the UN Security Council regimes, always;
2. the regimes of every country where the firm is incorporated, licensed or registered, or has staff;
3. regimes that reach the firm through its banks, payment partners, stablecoin issuers and investors, which often impose compliance as a contractual condition;
4. regimes the firm adopts by policy because of its customer base or risk appetite.

What sanctions measures do

Freezing is not confiscation. Frozen assets still belong to the designated person; they simply must not move. Most regimes allow licenses or exemptions, for example for basic living expenses, legal fees or humanitarian activity, granted by the competent authority. A firm releases or moves frozen assets only with written authorization in hand.

Who is covered: designations, ownership and control

Designations name individuals and entities (companies, groups, vessels) and, in some autonomous regimes, virtual asset addresses listed as identifiers of a designated party. The obligation reaches further than the list itself. INR.6 describes the assets to freeze as those owned or controlled by designated persons, wholly or jointly, directly or indirectly; assets derived or generated from them; and assets of persons acting on their behalf or at their direction.

Ownership and control rules decide when an undesignated company is treated as if it were designated, and regimes vary. One common form is an aggregate 50% rule: an entity owned 50% or more in total by one or more designated persons is itself blocked. Other regimes look at whether a single designated person holds more than half, or exercises control through voting rights, board appointments or agreements.

A worked example. Company X has no listing. Designated person A owns 30% of it and designated person B owns 25%. Company X owns 60% of Company Y.

• Under an aggregate 50% rule, X is blocked (30% + 25% = 55%), and so is Y, because a blocked entity owns 60% of it.
• Under a rule that looks only at a single holding above 50%, neither is automatically caught, but the firm must still assess whether A or B controls X, for instance by appointing its directors.
• Either way, the onboarding file should show the ownership chain, the percentages, the rule applied and the date of the check.

This is why beneficial ownership data (see the lesson Legal persons and beneficial ownership) feeds sanctions screening: a customer whose name appears on no list can still be prohibited.

Duties: freeze, block, report

When a match is confirmed, the firm's duties usually follow this order:

1. Freeze assets in its custody and stop pending transactions. For crypto this means locking the account, or moving funds to a segregated, controlled wallet under a documented procedure, so that nothing reaches the designated party.
2. Block or reject new transfers to or from the designated party, without sending funds back to them.
3. Report the freeze to the competent authority within the period its regime sets, with identifiers, amounts and transaction references. A suspicious transaction report to the financial intelligence unit may also be needed where there are wider grounds for suspicion.
4. Record the match, the evidence and every action taken, and keep the file for at least the standard retention period.

Liability is often strict: in many regimes a firm can be penalized for a prohibited transaction even if it did not know, although authorities usually weigh the quality of its controls, its cooperation and any voluntary disclosure when setting the penalty. The practical consequence is that sanctions controls must act before a transaction completes, not after it.

Exam focus: how sanctions differ from AML/CFT (no threshold, prohibition rather than suspicion, often strict liability); FATF R.6 and R.7, freezing "without delay" and how R.15 brings virtual assets in; why UN sanctions bind all member states (Article 25 of the UN Charter); sanctions committees, the Consolidated List and resolution 1373 national designations; autonomous regimes and how a firm decides which ones apply; the main measures (asset freeze, prohibition on making available, sectoral, territorial); ownership and control, including computing an aggregate 50% test; the freeze, block, report and record sequence.