We’re only halfway through 2018, but this year has already presented a whirlwind of challenges for sanctions compliance teams. The US Treasury announced sanctions on six of the 92 powerful Russian oligarchs originally identified under CAATSA section 241 as potentially sanctioned individuals. The recent withdrawal of the United States from the Iran nuclear deal now adds a bevy of regulatory obligations for compliance departments. Factor in US sanctions against Venezuela and an uncertain situation in North Korea, and it’s easy to see why compliance teams are feeling more challenged than ever before, particularly as the reach of secondary sanctions adds a layer of complexity to their effects on the global financial system.
Governments find sanctions to be effective foreign policy tools for targeting powerful institutions, corporations and individuals operating in specific economic sectors of any given country. But global financial institutions say complying with the proliferation of US sanctions activity is burdensome and demanding. Compliance teams must store and analyse massive amounts of constantly changing data associated with the underlying structure of a security and its shareholder value while also remaining current on all corporate actions that may change the status of the instrument.
Smart financial institutions understand that it is not enough to simply be aware of potential sanctions and stay ready to comply with them. It is equally important to have systems and processes in place to accurately gather and translate voluminous amounts of financial data to track risky securities and safeguard client portfolios. When institutions receive indications that individuals or businesses are likely to be subject to upcoming sanctions, they need to be able to act. Being ahead of the curve on sanctions is essential for responding quickly and effectively.
Cutting ties with sanctioned Iranian businesses and banks within the allotted 180-day period is a daunting and laborious task for compliance departments, particularly since they have just addressed the strengthened sanctions against Russia. Each round of sanctions responses requires data-intensive work in a short period of time. Prescient financial institutions will have safeguarded their businesses with databases and processes that are sophisticated and nimble enough to quickly align with regulations before falling victim to significant consequences.
Institutions must also be prepared to deal with the ripple effect caused by America’s use of secondary sanctions against companies that do business with Iran. Because of these sanctions, foreign organizations that have significant relationships with targeted entities in Iran may themselves become subject to US sanctions, causing reverberations across the global financial system. Institutions must not only track their exposure to the instruments affected by primary sanctions, but also their exposure to other institutions that are heavily involved with the sanctioned entities. This vastly expands the slate of instruments that must be monitored in order to stay ahead of the curve. While the EU has floated the idea of a counter-secondary sanction law that protects EU businesses, firms still need to respect secondary sanctions for the moment to be on the safe side. At the very least, they must be aware of these sanctions in order to balance between US and Iran trade relations.
The flurry of sanctions activity over the past several months represents another challenge and opportunity for institutions to address their data and processes. Financial institutions operating globally are inherently subject to geopolitical risk and reward, and no risk is quite as obvious as sanctions noncompliance. The confluence of sanctions against Russia, with its highly liquid market and, now, Iran, with 1,000 sanctioned entities and more than 860 sanctioned financial products, prove that access to an all-encompassing, continuously updated database of potentially affected instruments is critical for compliance.
Oliver Bodmer works in SIX’s sanctions compliance division