Sanctions Screening and AML

The legal framework

Two sets of rules apply, and they overlap in practice. Sanctions restrict dealings with designated persons, entities and countries. Anti-money-laundering (AML) rules require certain professions to identify their customers and report suspicious transactions. Both depend on knowing who is behind a counterparty.

Sanctions

EU restrictive measures are adopted by Council decisions and regulations, and the regulations apply directly in every Member State. They bind all EU persons and companies, in every sector. The best-known examples are the asset freezes and trade restrictions against Russia since 2022, for example in Regulation (EU) No 269/2014. Typically they prohibit making funds or economic resources available, directly or indirectly, to a designated person, and the control rules mean that an entity owned or controlled by a designated person may be caught even if it is not itself on a list. Other measures restrict exports, services and financing.

The regulations apply directly, but enforcement and penalties are national and differ per member state. In many countries breaches of sanctions are criminal offences, and a national authority administers asset freezes. Check the current national rules for each country where you operate.

Screening means checking customers, suppliers, counterparties and beneficial owners against the EU consolidated list, UN lists and, depending on the business's links, US and UK lists. A business with no financial licence is still bound by the prohibition and needs at least a basic process at the start of every new relationship.

AML

The EU framework is Directive (EU) 2015/849 (the Fourth AML Directive, amended since), which each member state transposes into national law. The rules apply to obliged entities: financial institutions, notaries, lawyers in specified transactions, accountants and tax advisers, real estate agents, company service providers and certain dealers in high-value goods, among others.

Obliged entities must perform customer due diligence: identify and verify the customer and its beneficial owners, understand the purpose of the relationship, and monitor it. Higher-risk situations, such as politically exposed persons and high-risk countries, require enhanced due diligence. Suspicious transactions are reported to the national financial intelligence unit.

Beneficial owners

EU law also requires every member state to keep a register of ultimate beneficial owners (UBO register). Companies and other entities must identify the natural persons who own or control them and record them. Under the current EU rule, a person is a beneficial owner when holding more than 25% of the shares or voting rights, or controlling the entity by other means. If nobody meets the test, the senior managing officials are recorded. Entities must keep the data accurate and up to date.

What is changing

The EU AML package of 2024 includes Regulation (EU) 2024/1624, which applies directly from July 2027 and replaces much of the national detail with one rulebook. It also creates a European AML Authority (AMLA). The beneficial-owner test becomes an ownership interest of 25% or more, instead of more than 25%, and customer due diligence is harmonised. National laws will be adjusted accordingly.

In practice

A software group is negotiating the purchase of a Dutch company. The seller is a holding company in a third country, owned through two further layers. Before signing, the buyer's lawyers ask who the ultimate owners are. The register of the holding company is not public, and the seller's documents list a trust. They obtain a certified chart and screen every natural person and entity against the EU list.

One name matches closely. The lawyers investigate: the date of birth and nationality do not match, and the match is a false positive. They record the check and the reason. If the match had been true, the transaction could not proceed, assets would have been frozen where applicable, and the authority would have had to be notified.

The same company, as a seller of its own product, adds a screening step to its onboarding of distributors, so that no new distribution contract is concluded with a listed party. The checks are documented in its data room with the deal papers, contracts with sanctions and compliance clauses are reviewed with contract review, and its portfolio shows where its IP is licensed to third parties who should be screened.

Frequently asked questions

Do sanctions apply to companies that are not financial institutions?

Yes. EU sanctions bind all EU persons and companies. AML procedures apply only to obliged entities, but the sanctions prohibition is universal.

What should we do on a screening match?

Escalate immediately and do not proceed with the transaction until it is clear whether the match is true or false. Document the investigation either way.

Who has to be recorded in the UBO register?

The natural persons who ultimately own or control the entity, based on ownership or voting rights above the threshold or control by other means.

Are lawyers subject to the AML law?

In specified activities, such as helping to prepare or carry out certain transactions, yes. They apply customer due diligence in those cases.

How this connects

Counterparty checks are part of the preparation in M&A and due diligence. For the wider deal, see M&A for Growing Businesses and M&A Due Diligence: What to Expect.