In 432 BC, a messenger sent by Athens to Megara, a nearby rival city, was unceremoniously killed after delivering his message. To retaliate, Pericles, the Athenian leader, issued a decree banning any Megarian traders from Athenian ports and marketplaces: thus, the first sanction was born. Sanctions, tariffs, and embargoes have developed since Ancient Greece, most recently becoming a hot topic in global trade when most Western countries imposed sanctions on Russia after its illegal invasion of Ukraine in 2022. 

Modern sanctions are becoming more sophisticated, and more complex, than ever; on top of straightforward tariffs and embargoes, specific financial tools can be used to cripple a country’s economy and connection to the outside world, such as when the EU and US blocked Russia’s access to the SWIFT financial messaging system in 2022.

For companies operating across multiple countries, some of which may be the object of sanctions, negotiating these barriers while staying within the law in both jurisdictions is crucial. At the Economic Sanctions Summit in London on 20 March, a panel of lawyers and compliance officers discussed how to navigate the most difficult aspects of sanctions and how technology tools like AI can help. 

The strain of sanctions

Whenever a government announces sanctions against another country, it – often correctly – sees financial institutions as the first line of defence, making sure no money goes where it shouldn’t. However, this puts a strain on those institutions in the form of additional supervision, audit, and compliance to adhere to the sanctions – which can often imply a higher workload for compliance and a strain on resources. 

While AI solutions have been hailed by almost every sector for their revolutionary automation capabilities, compliance and audit are where AI’s potential can truly be life-changing. AI tools – which can range from simple rule-based automation to generative AI tools that mimic what a person would do in a situation – can massively simplify and speed up financial institutions’ sanctions screening process. 

To be approved by regulators, however, AI solutions can’t be completely autonomous: a human component, whether as an oversight or double checking the AI’s work, is important to maintain transparency and explainability. “Solutions that run on AI models should be designed in a way that the user of the solution can explain why the solution is making certain decisions […] to internal audit, external audit, regulators, [and] clients,” said Marketa Piecuchova, Compliance Officer at Swiss Re.

Effectiveness vs efficiency: The data problem

The way to train AI, especially generative models, is data – which makes having enough accurate, up-to-date information on past transactions more important than ever. Using narrow data points and applying AI solutions gradually to individual aspects of compliance can help make the first line of defence faster, cheaper, and more efficient. 

A crucial step for companies adapting to shifting sanction regimes is training their staff – both in using and working with AI models, and on the evolving compliance requirements imposed by sanctions. Sometimes, AI-powered tools can do more harm than good, especially if they produce so many false positives that their alerts swamp the teams in charge of reviewing them. Having the correct data can go a long way to increasing the efficiency of those tools without compromising on accuracy.

Compliance teams have other tools to screen clients which have been used for years before AI came into the scene and are for the most part still useful – tools like due diligence procedures, understanding a client and their business, and investigating clients’ ownership structures. However, many in the industry feel that technology hasn’t been used to its full potential, leading to outdated processes that are not keeping up with the development of sanctions. “In the last 10 years, we’ve seen significant evolution in the way the sanctions are used and […] the innovation that’s been tried by sanctions authorities […] hasn’t really moved with that evolution,” said Richard Dunmall, EMEA Head of Sanctions at Sumitomo Mitsui Banking Corporation (SMBC). 

From compliance to litigation

Another important but oft-overlooked aspect of adapting to sanctions is managing the litigation brought by parties from the affected country against financial institutions enforcing sanctions. Russian firms have been known to sue banks that do not honour their obligations to comply with EU sanctions, leading to a lengthy and costly litigation process. 

The possibility of legal proceedings makes it even more crucial to have a clear view of how decisions about sanctions compliance are made and document every aspect of the process to protect firms against accusations of unfairly flagging transactions. On the flip side, having well-documented procedures can also shield a company that has done everything it could to comply with sanction regulations from legal liability if those efforts ultimately failed, said Michael Munk, Senior Managing Associate at Linklaters: “There was a Court of Appeal decision recently […] where it was confirmed that if the relevant person of the firm is able to show that they reasonably believe they will be complying with UK sanctions regulations, then that will be a defence to civil liability.”

—

In today’s precarious global geopolitical situation, sanctions are unlikely to go anywhere anytime soon: while they can sometimes be more a precursor than an alternative to more overt warfare – the Athenian sanctions in 432 BC were shortly followed by the Peloponnesian War – they are a crucial diplomatic tool for rival countries. Financial institutions are often at the centre of sanction enforcement, acting as one of the first and last lines of defence. This makes it crucial for their audit and compliance teams to stay on top of developments in regulations and make the most of tools, like AI-powered solutions, to make applying sanctions easier and more accurate.