The scale and level of coordination with which these measures were implemented were unprecedented. There can be no doubt that they have impacted Russia’s financial strength, overall, and its banking industry in particular. Estimates of the impact of sanctions on Russia’s GDP in 2022 range from a contraction of 2.2% to 3.9%. However, it can’t be ignored that the combination of national and individual sanctions has not crippled military funding nor has it delivered a fatal blow to Vladimir Putin’s aggressive tactics.

Andrew Davies

Andrew Davies, Global Head of Regulatory Affairs at ComplyAdvantage, is a veteran of the financial crime risk management world. Before joining ComplyAdvantage, he served as vice president of global market strategy at Fiserv. Andrew works with customers worldwide to design and deploy effective risk management solutions to mitigate financial crime risks.

Historical efficacy

While the oldest recorded example of economic sanctions took place in ancient Greece, they have become an important first-response mechanism in modern international politics as a way to counter aggression, terrorism, and human rights abuses. But increasingly, people around the world are asking: do they actually achieve what they set out to do or are they merely a paper tiger, more menacing in print than in fact? Aren’t the subjects of economic measures able to easily hide their activities, remaining relatively unscathed? And, lastly, how can they be effective if some countries refuse to enforce them, as has been the case with India and China?

The answer is a complicated one. If you compare the financial and regulatory landscape of 2022 with that of 1992 (Persian Gulf War I and the start of the civil war in Yugoslavia) or even that of 2002 (following the 9/11 attack and the conflicts in Afghanistan and Iraq), technology has transformed the implementation of sanctions, making them more difficult to evade. Financial services companies that support sanctions enforcement are now able – and expected – to update and reflect newly named individuals or organizations instantly, eliminating the time lag that, only decades ago, was easily exploited.  

Another positive is that technology has also helped economic sanctions evolve from a blunt force instrument that historically hurt civilians with hyperinflation and deprivation, becoming a surgeon’s scalpel that can be focused on the politicians and business leaders supporting corrupt regimes.

International cohesion

However, there remain two unfortunate realities: there will always be non-aligned countries that choose to ignore the will of the international community. And sanctioned individuals can and do still operate, moving money undetected in the financial system by working through shell companies or associates who have not been flagged.  

This is why it is imperative for governments and regulatory agencies to take this moment in time for an honest assessment of Russian sanctions and use the learnings to make much-needed improvements to the system. While there is nothing that can be done to force the international community to act as a united front, there are other weaknesses that can and should be shored up.

First, there needs to be far more international collaboration involving intelligence agencies, regulatory bodies, and financial institutions. For sanctions to be effective, they need to be immediate. For them to be immediate, the companies that are on the hook to implement them need to know they are flagging the correct person. Intelligence agencies need to share their broader array of data on these individuals to eliminate the false positives that cause delays.

Another positive is that technology has also helped economic sanctions evolve from a blunt force instrument that historically hurt civilians with hyperinflation and deprivation, becoming a surgeon’s scalpel that can be focused on the politicians and business leaders supporting corrupt regimes.

Next, the related data needs to be used to create a more layered approach to sanctions screening that includes family members, known associates and businesses, and other related information. With this additional data, the full network comes to light, making it possible for behavioral analytics to identify patterns of transactions, detecting and choking off funding to the sanctioned person or organization.

Finally, politically exposed persons (PEPs) need to be identified and risk assessed on all relationships on an ongoing basis. Currently, governments do not provide a singular source of truth with regards to who is appointed or elected to public functions at the national or local level.  This requires labor- and time-intensive manual research. Regularly providing this information would improve the timeliness and efficacy of sanctions and would have the additional benefit of strengthening the detection and prevention of financial crimes such as bribery and corruption.  

Governments and regulatory bodies have made financial institutions the point of the spear to fight this particular type of diplomatic warfare, so it is past time for them to provide better data that will help win this battle. If sanctions are to be more than performative political theater and to have the impact that was originally intended, now is the time to acknowledge and address the weaknesses in the system in preparation for the next international conflict.