They need fresh data to override outdated information and to overcome the complexity in this area, writes Oliver Bodmer, Senior ProductManager at SIX Financial Information. New technology is available that enables firms to receive comprehensive daily lists of securities and entities, to avoid trades that could put them in violation of the sanctions, Mr. Bodmer explains.
On the brink of conflict, diplomatic tensions around Russia and Ukraine threaten to spill over into actions asa coalition of Western countries consider measures to de-escalate the situation in Eastern Europe. As a result, tensions of a different kind will be building within financial institutions at the prospect of far-reaching anctions. The war of words should sound as an alarm bell for market participants as another compliance challenge looms.
The sanctions threat is not a new one though. The US has driven the international growth in sanctions, with measures against companies and individuals in China, Iran, Venezuela, Syria, Belarus and now potentially a sweeping set of measures against Russian banks, companies and individuals, including senior individuals within the Russian state.
The sanctions currently being discussed on materials deemed crucial for technology and energy exports will certainly impact large parts of the markets and businesses. However, those potential restrictions targeting the banks and interactions in financial markets are of the greatest concern.
Why is that? Determining sanctioned entities and all their issued securities, as well as uncovering domestic or foreign subsidiaries (or other holdings of more than 50%) is a significant challenge. Consider a non-Russian bank that is owned by a Russian parent. Compliance with Russian sanctions would logically include securities issued by the subsidiary. In cases where this has happened, several regulators did initially include the subsidiary bank securities under their Russian sanctions directives, but US regulators later deemed them out of scope.
The difficulty outlined in this example will be on the radar of compliance teams at financial institutions. The big problem is that not all firms are well-placed to cope with the impact of new restrictions from a data standpoint. As a result, new measures of the scale proposed for Russia could make large fines possible.
To minimise the impact, financial institutions should be taking this issue seriously with sanctions screening a must. This is especially true as a result of the sophisticated tactics used to try and evade screening. For example, some sanctioned entities – including companies, subsidiaries or individuals – hide within complex structures, so it is critical for firms to be aware of not just the individual or company on the global sanctions list, but of all companies and financial instruments controlled by, owned by, or even connected to them.
As such, banks should look more closely at where data comes from to ensure they protect themselves from the risk of acting on outdated information that could leave them in breach of various global sanctions. With so much outdated information in the market, it is now even more essential that banks can see everywhere the information has been, all before arriving to the shaping, integration and co-mingling to ensure compliance. New technology also enables firms to automatically receive up-to-date and comprehensive daily lists of securities and entities to avoid in trades.
While the world watches in hope that tensions ease, compliance teams should be working with more than ‘hope’ when it comes to safeguarding against sanctions. Those that utilise fresh high quality sanctioned securities and entities data for screening will be well-placed to minimise the impact on trading activities, as well as avoid serious fines and reputational damage. As a result, banks can focus on navigating the potential macro consequences in the economy and the markets and ensuring they continue to provide the best possible service to their clients.