In 432 BCE, tensions between Athens and Megara escalated when an Athenian messenger was killed after delivering a diplomatic message. In response, the Athenian leader Pericles imposed a decree banning Megarian traders from Athenian ports and marketplaces. This economic restriction, known as the Megarian Decree, is considered one of the earliest recorded sanctions in history.
Sanctions, tariffs, and embargoes have evolved significantly since those early days, becoming vital tools in international diplomacy. In modern times, they have gained global attention, most notably when Western nations imposed severe economic sanctions on Russia following its illegal invasion of Ukraine in 2022.
The Growing Complexity of Modern Sanctions
Sanctions today are far more intricate than their ancient counterparts. While trade restrictions and embargoes remain central, financial sanctions have taken a more sophisticated turn. One of the most notable examples is the European Union and the United States blocking Russia’s access to the SWIFT financial messaging system in 2022, cutting off its global financial connectivity.
For multinational businesses, navigating these complex and ever-evolving sanctions is a challenge. Companies operating in multiple jurisdictions must ensure compliance with different regulatory frameworks while maintaining operational efficiency. This was the focus of the Economic Sanctions Summit held in London on March 20, where legal and compliance experts explored ways to handle these challenges effectively and examined how artificial intelligence (AI) is revolutionizing sanction compliance.
The Burden of Compliance on Financial Institutions
When governments implement sanctions, financial institutions often become the frontline enforcers, ensuring that sanctioned entities do not access restricted funds or markets. This responsibility comes with increased scrutiny, audits, and compliance measures, significantly straining financial institutions’ resources.
AI is emerging as a game-changer in this domain, with its ability to streamline compliance processes. AI tools, ranging from rule-based automation to advanced generative AI models, can speed up sanctions screening and minimize human workload. However, regulatory bodies insist that AI solutions must not operate autonomously. There must always be human oversight to maintain transparency and accountability. As one panelist at the Economic Sanctions Summit noted, AI-driven solutions must be designed in a way that allows users to explain their decision-making process to auditors, regulators, and clients.
Effectiveness vs. Efficiency: The Data Challenge
The effectiveness of AI in sanctions compliance heavily depends on high-quality data. AI models require accurate, up-to-date information to function optimally. Implementing AI gradually in specific areas of compliance—rather than across all processes at once—can enhance efficiency without overwhelming compliance teams with false positives.
Beyond AI, traditional compliance tools remain valuable. Due diligence, understanding client business operations, and investigating ownership structures continue to play critical roles in sanctions enforcement. However, some experts believe that the use of technology in compliance has not kept pace with the rapid evolution of sanctions. As one panelist noted, while sanctions have undergone significant transformations in the past decade, regulatory innovations have not progressed at the same speed.
The Legal Fallout: Compliance vs. Litigation
Another critical aspect of sanction enforcement is dealing with legal challenges. Financial institutions enforcing sanctions sometimes face lawsuits from affected entities. Russian businesses, for instance, have sued banks that refuse to process payments due to EU sanctions, leading to prolonged and costly litigation.
To mitigate legal risks, financial institutions must maintain meticulous records of compliance decisions. A well-documented compliance framework can serve as a defense against legal claims and demonstrate a firm’s commitment to adhering to regulatory requirements. A recent UK Court of Appeal ruling underscored this point, affirming that if a company can show it reasonably believed it was complying with sanctions regulations, it could use that as a defense against civil liability.
The Future of Sanctions and Compliance
In today’s turbulent geopolitical climate, sanctions are likely to remain a key tool of economic statecraft. Historically, sanctions have often preceded larger conflicts—such as how Athens’ sanctions against Megara contributed to the outbreak of the Peloponnesian War. While modern sanctions aim to deter aggression, they also place financial institutions at the heart of enforcement efforts.
To navigate this landscape effectively, compliance teams must stay informed about evolving regulations and leverage AI-driven solutions for more efficient and accurate enforcement. By blending technological innovation with rigorous oversight, financial institutions can better fulfill their role as the guardians of global economic security.
Indrajit Roy Choudhury 