Sanctions: Types, Targets and Evasion

Why This Topic Matters for the CAMS Exam

Sanctions sit at the intersection of AML, counter-terrorist financing and national security, and they are one of the most heavily tested areas within the Financial Crime Risks and Methods domain of the CAMS exam. Regulators worldwide treat sanctions breaches as a strict liability offence in many jurisdictions (most notably under the US Office of Foreign Assets Control, OFAC), meaning a financial institution can be penalised even when it did not intend to violate the law. Fines have reached billions of dollars (for example BNP Paribas paid roughly USD 8.9 billion in 2014 for processing transactions involving Sudan, Iran and Cuba), and individual compliance officers can face personal liability.

For a CAMS candidate, understanding sanctions is essential because:
• Sanctions screening is a core control in every AML/CFT programme.
• Sanctions evasion techniques closely resemble money laundering typologies (shell companies, trade-based schemes, nested accounts), so the examiner expects you to recognise overlaps.
• Questions frequently test your ability to distinguish between types of sanctions, identify the correct regulatory body, and spot red flags of evasion in a scenario.

What Are Sanctions?

Sanctions are restrictive measures imposed by governments or international bodies to achieve foreign policy, national security or human rights objectives without resorting to military force. They aim to change the behaviour of a target by restricting access to funds, markets, goods or travel. Sanctions can be used to:
• Combat terrorism and its financing.
• Prevent the proliferation of weapons of mass destruction (WMD).
• Respond to human rights abuses or corruption (e.g. Global Magnitsky-style programmes).
• Deter aggression or violations of international law (e.g. measures against Russia following the invasion of Ukraine).
• Disrupt narcotics trafficking and transnational organised crime.

Key Sanctions-Issuing Bodies

• United Nations Security Council (UNSC) – imposes sanctions through resolutions under Chapter VII of the UN Charter. All member states are obliged to implement them. The UN maintains a Consolidated Sanctions List. UN sanctions are multilateral and binding on all members.
• OFAC (US Treasury) – administers and enforces US economic and trade sanctions. Maintains the Specially Designated Nationals and Blocked Persons (SDN) List, the Sectoral Sanctions Identifications (SSI) List and other lists. OFAC sanctions apply to US persons (citizens, residents, entities organised in the US and their foreign branches), anyone physically in the US, and transactions involving US dollars that clear through the US financial system.
• European Union – adopts restrictive measures through Council Regulations that are directly applicable in all member states; maintains the EU Consolidated List.
• United Kingdom – HM Treasury's Office of Financial Sanctions Implementation (OFSI) implements financial sanctions post-Brexit under the Sanctions and Anti-Money Laundering Act 2018 (SAMLA).
• Other national regimes include Canada (Global Affairs Canada), Australia (DFAT), Japan (MOF), Switzerland (SECO) and many others.

Remember: UN sanctions are the floor, not the ceiling. National regimes (particularly the US) often go further, creating conflicts of law that institutions must navigate.

Types of Sanctions

1. Comprehensive (Country-Based) Sanctions
These prohibit virtually all transactions with an entire country or territory, including its government, companies and residents. Examples: US sanctions on Cuba, Iran, North Korea, Syria and the Crimea region. Any dealing with persons ordinarily resident in these jurisdictions is generally prohibited absent a licence.

2. Targeted or Smart (List-Based) Sanctions
Directed at specific individuals, entities, vessels or aircraft rather than whole countries. They typically involve asset freezes and travel bans. Designed to minimise humanitarian impact on ordinary civilians. The SDN list is the classic example. Designations may cover terrorists (SDGT), narcotics kingpins (SDNTK), WMD proliferators (NPWMD) and human rights abusers.

3. Sectoral Sanctions
Restrict specific types of activity with particular sectors of an economy (e.g. energy, finance, defence) without fully blocking the targeted entity. OFAC's Directives against Russian banks and energy companies (since 2014) restrict new debt and equity above certain maturities but do not freeze all assets. Sectoral sanctions are nuanced and require institutions to understand what is prohibited, not just who is listed.

4. Secondary Sanctions
Target non-US persons who engage in significant transactions with sanctioned parties, even where there is no US nexus. They effectively force foreign institutions to choose between US market access and dealing with the target (e.g. Iran, North Korea, Russia-related programmes). Secondary sanctions explain why many non-US banks apply OFAC lists even when not legally bound by them.

5. Trade Sanctions and Embargoes
Prohibit import or export of goods, services or technology. Includes arms embargoes and controls on dual-use goods (items with both civilian and military applications). Export controls are administered separately in the US by the Bureau of Industry and Security (BIS) through the Export Administration Regulations (EAR).

6. Financial Sanctions
Asset freezes, prohibitions on making funds or economic resources available, restrictions on access to capital markets, and bans on correspondent banking relationships (e.g. Section 311 special measures under the USA PATRIOT Act, although technically an AML tool rather than a sanction).

7. Diplomatic Sanctions and Travel Bans
Expulsion of diplomats, suspension of official visits, and prohibitions on entry of designated individuals. Travel bans are typically enforced by immigration authorities rather than banks, but financial institutions should note them as part of customer risk assessment.

Targets of Sanctions

• Countries and governments – entire jurisdictions, central banks, state-owned enterprises.
• Individuals – heads of state, officials, oligarchs, terrorists, narcotics traffickers, human rights abusers, cyber criminals.
• Entities – companies, banks, charities used as fronts, political parties, militias.
• Vessels and aircraft – identified by name, IMO number, flag and call sign; often targeted in North Korea and Iran oil-smuggling programmes.
• Sectors – finance, energy, defence, mining, shipping.
• Cryptocurrency addresses – OFAC now lists digital currency addresses associated with designated persons.

The OFAC 50 Percent Rule
A critical concept: any entity owned 50 percent or more, directly or indirectly, in the aggregate, by one or more blocked persons is itself blocked, even if it is not named on the SDN list. The EU and UK apply similar ownership and control tests (the EU also considers control, not only ownership). This means institutions must identify beneficial ownership to screen effectively.

How Sanctions Compliance Works in Practice

Screening
Institutions screen customers, beneficial owners, counterparties, vendors and transactions against relevant lists. Screening occurs at onboarding, periodically (and whenever lists update) and in real time for payments. Name-screening systems use fuzzy-matching logic to catch spelling variations, transliterations and aliases. Transaction screening examines all SWIFT message fields, including originator, beneficiary, intermediary banks, free-text fields and references to vessels, ports or goods.

Blocking vs Rejecting
• Blocking (freezing) – when an institution holds property in which a blocked person has an interest, it must freeze the funds in an interest-bearing account and report to OFAC within 10 business days. Blocked property cannot be returned.
• Rejecting – when a transaction is prohibited but no blocked party has a property interest (e.g. a sectoral violation or a payment involving a comprehensively sanctioned country where no listed party is involved), the institution refuses to process it and returns funds. Rejected transactions are also reported within 10 business days.
• US institutions file an Annual Report of Blocked Property by 30 September each year.

Licences
• General licences – published authorisations permitting certain categories of transactions (e.g. humanitarian aid, legal fees) without applying individually.
• Specific licences – issued to a particular applicant for a particular transaction upon written request.

Sanctions Compliance Programme (SCP)
OFAC's 2019 Framework for OFAC Compliance Commitments identifies five essential components:
1. Management commitment.
2. Risk assessment.
3. Internal controls.
4. Testing and auditing.
5. Training.
Common root causes of violations cited by OFAC include lack of a formal programme, misinterpreting regulations, facilitating transactions by non-US persons, exporting goods to sanctioned persons, utilising the US financial system for prohibited transactions, inadequate screening software, improper due diligence, decentralised compliance functions, and individual misconduct.

Sanctions Evasion: Methods and Typologies

Sanctions evasion is the deliberate circumvention of restrictions, and the techniques used overlap heavily with money laundering. The CAMS exam expects you to recognise these patterns.

1. Wire Stripping (Payment Stripping)
Deliberately removing, altering or omitting information in payment messages (such as the name of a sanctioned bank, country or person) so the transaction passes through screening filters. This was the core misconduct in many landmark enforcement actions against international banks. Red flag: payment messages with missing originator data, generic references, or instructions from a correspondent to leave fields blank.

2. Shell and Front Companies
Sanctioned parties establish layers of companies in third countries, often with nominee directors and opaque ownership, to disguise the true beneficiary. Ownership may be deliberately kept just below 50 percent to avoid the aggregation rule. Red flags: recently incorporated companies with no commercial history, registered agents at mass-registration addresses, ownership chains spanning multiple secrecy jurisdictions.

3. Use of Proxies, Family Members and Associates
Assets are transferred to spouses, children, business partners or trusted intermediaries who are not themselves listed. Oligarch-related enforcement highlighted yachts, real estate and art held through relatives and trusts.

4. Nested Accounts and Correspondent Banking Abuse
A sanctioned bank or its customers gain access to the international financial system by using accounts held at a non-sanctioned bank, which in turn has a correspondent relationship with a major clearing bank. The clearing bank sees only the intermediary bank's name.

5. Trade-Based Evasion and Transshipment
Goods destined for a sanctioned country are shipped via third countries (e.g. UAE, Turkey, Hong Kong, Central Asian states) with falsified end-user certificates, bills of lading and invoices. Dual-use components are mislabelled as ordinary industrial parts. Procurement networks for Iran, North Korea and Russia rely heavily on this method. Red flags: the shipping route makes no commercial sense, the stated end user cannot be verified, goods are inconsistent with the buyer's business, or payment comes from an unrelated third party.

6. Maritime Evasion
Common in oil and coal smuggling for North Korea, Iran and Venezuela, and in the Russian shadow fleet:
• Disabling or manipulating the Automatic Identification System (AIS) to go dark.
• Ship-to-ship (STS) transfers at sea to obscure cargo origin.
• Flag hopping – frequently changing the vessel's flag state, often to flags of convenience.
• Renaming vessels and repainting IMO numbers.
• Falsified cargo documents and port-of-origin declarations.
• Complex ownership of vessels through single-ship companies.

7. Alternative Payment Channels
• Virtual assets – using cryptocurrency, mixers, privacy coins and non-compliant exchanges (North Korea's Lazarus Group is a prime example of crypto theft and laundering to fund weapons programmes).
• Hawala and informal value transfer systems – moving value without electronic trails.
• Cash and precious metals – gold smuggling has been used to monetise sanctioned oil revenues.
• Barter arrangements – exchanging oil for goods to avoid banking channels.
• Non-USD currencies and alternative messaging systems – shifting to currencies and payment rails outside US and European jurisdiction.

8. Name Manipulation
Using aliases, alternative transliterations (e.g. Arabic, Cyrillic or Chinese names rendered differently in Latin script), abbreviations, reversed name order, or inserting or removing hyphens and spaces to defeat screening algorithms.

9. Diplomatic and Charitable Cover
Use of diplomatic accounts, embassies, or charities and NGOs to move funds for designated regimes or terrorist groups.

Key Red Flags of Sanctions Evasion

• Customer or counterparty refuses to provide information about end users, ownership or purpose of goods.
• Transactions routed through jurisdictions with no apparent business rationale, particularly those bordering or trading heavily with sanctioned countries.
• Payments for goods made by third parties unrelated to the transaction.
• Sudden changes in ownership of a company shortly after a designation.
• References in payment details to vessels, ports or cities in sanctioned regions.
• Shipping documents that are inconsistent or vague (e.g. general-purpose descriptions for sophisticated equipment).
• Use of letters of credit with unusual amendments to beneficiary or port details.
• Vessel activity showing AIS gaps near sanctioned waters.
• Customer operating in a high-risk sector (oil, defence, aviation parts, microelectronics) with links to sanctioned regions.

Exam Tips: Answering Questions on Sanctions: Types, Targets and Evasion

Tip 1: Know the vocabulary precisely. The exam often hinges on distinguishing terms: comprehensive vs targeted, sectoral vs list-based, blocking vs rejecting, general vs specific licence, primary vs secondary sanctions. If a question describes restrictions on new debt or equity for a company that is not fully frozen, the answer is sectoral. If a question describes freezing funds of a named individual, it is targeted or list-based.

Tip 2: Match the regulator to the jurisdiction and list. SDN list = OFAC (US). Consolidated List = UN or EU/UK depending on context. OFSI = UK. UNSC resolutions are binding on all member states. If a question asks what makes UN sanctions different, think multilateral and universally binding.

Tip 3: Remember the 50 percent rule. Any question involving an unlisted subsidiary owned 50 percent or more in aggregate by blocked persons should be treated as blocked. Watch for scenarios where ownership is split 30 percent and 25 percent between two SDNs – that is 55 percent in aggregate and the entity is blocked.

Tip 4: Strict liability is the default mindset. If a scenario asks whether an institution can be penalised despite good intentions or lack of knowledge, the answer under OFAC is generally yes. Intent affects the size of the penalty, not whether a violation occurred.

Tip 5: Know the reporting timelines. Blocked and rejected transactions must be reported to OFAC within 10 business days; the annual blocked property report is due 30 September. Frozen funds must be placed in an interest-bearing account and must not be returned to the remitter.

Tip 6: In scenario questions, look for the evasion typology. The exam loves describing a fact pattern and asking what red flag or technique is present. Removing bank names from SWIFT messages = wire stripping. Cargo transferred between ships at sea with AIS switched off = maritime evasion. Goods routed through a third-country intermediary with unusual end-user documentation = transshipment. A sanctioned bank's customer using another bank's correspondent account = nesting.

Tip 7: Choose the most appropriate compliance action, not the most aggressive. When asked what an institution should do upon a potential match, the correct sequence is usually: hold or pause the transaction, investigate to confirm or clear the match (true match vs false positive), escalate to the sanctions compliance function, then block or reject and report if confirmed. Do not immediately file a SAR and close the account before confirming; do not process and investigate afterwards.

Tip 8: Understand the AML and sanctions overlap and the differences. Sanctions screening is list-based and preventive at the point of transaction; AML monitoring is behaviour-based and often detective after the fact. A suspected sanctions evasion attempt may also warrant a suspicious activity report because evasion is itself a crime in most jurisdictions.

Tip 9: Beware of absolutes and distractors. Answer options stating that sanctions only apply to US persons, or that UN sanctions are optional, or that a non-listed entity can never be blocked, are typically wrong. The CAMS exam rewards nuanced understanding.

Tip 10: Read the question for the actual ask. Many candidates lose marks by identifying the correct typology but then choosing an answer that addresses a different part of the question (e.g. the question asks for the best next step, not the type of sanction). Underline the operative words: most likely, best, first, primary purpose.

Worked Example

Scenario: A correspondent bank in Europe receives a USD payment from a client bank in a Gulf jurisdiction. The payment message originator field contains only the words 'our customer' and the reference mentions delivery of machine parts to a port on the Caspian Sea. The client bank has recently asked the correspondent to remove the ordering customer name from future messages to 'streamline processing'. What is the most likely concern?

Analysis: Vague originator information, a request to strip identifying data, a USD payment creating a US nexus, and a reference to a geography associated with trade to a comprehensively sanctioned country together point to wire stripping to evade sanctions screening. The correct action is to hold the payment, request complete originator details, escalate to sanctions compliance, consider terminating or restricting the correspondent relationship, and report as appropriate. An answer choice that says simply process the payment because the Gulf bank is not itself sanctioned would be a distractor.

Summary Checklist

• Sanctions are foreign policy tools imposed by the UN, US (OFAC), EU, UK (OFSI) and others.
• Types: comprehensive, targeted/list-based, sectoral, secondary, trade/embargo, financial, diplomatic/travel.
• Targets: countries, individuals, entities, vessels, aircraft, sectors, crypto addresses.
• 50 percent aggregate ownership rule blocks unlisted subsidiaries.
• Compliance: screen, block or reject, report within 10 business days, obtain licences where available, maintain a risk-based SCP.
• Evasion: wire stripping, shell and front companies, proxies, nested accounts, transshipment and false documents, maritime techniques (AIS off, STS transfers, flag hopping), virtual assets, hawala, name manipulation.
• Exam approach: identify the type, the regulator, the typology, and the correct next step; remember strict liability and avoid absolute distractors.