With Global Sanctions Activity Increasing, How Can Compliance Departments Keep Up?

Joel Kornblum, Global Head of Strategic Alliances & Consultant Relations

If the world was flat in the early aughts, as the economist Thomas Friedman implied in his best-selling book, the past few years have become increasingly bumpy thanks to increasing populism and a volatile environment for global sanctions. This doesn’t just pose challenges for portfolio managers trying to stay ahead of geopolitics to manage risk. Compliance departments also have their hands full trying to keep track of certain positions and whether or not there are sanctions in place that ostensibly bar a fund from owning specific securities.

As evidenced by the initiation of several notable sanctions in just five months, it is evident that sanctions are growing. In November of 2018, for instance, broad sanctions were reinstated in Iran as a result of the U.S. withdrawing from the Iranian Nuclear Deal, while the Office of Foreign Assets Control (OFAC) also added Petróleos de Venezuela to its sanctions program (also known as the SDN list), following an executive order that cited human rights abuses of the Madura regime. OFAC also lifted sanctions on EN+ and Rusal, highlighting the challenge of not only tracking potential securities that are under sanctions, but also those that aren’t.

In light of how challenging these efforts can be, Eagle recently hosted a webinar, “Managing Global Sanctions Data with Eagle and SIX” in June. Webinar participants included Jeff Bellemare, Product Manager at SIX; Akhar Mathews, Head of Sales Support at Eagle; and myself.

To be sure, tracking sanctions securities, on top of the entities and individuals, presents an added complexity for asset managers as it relates to sanctions risk. Keeping on top of this data can also be costly. Compliance teams need to follow multiple sanctions regimes based on where their business is structured; research is also required to understand the specific ownership structures based on the 50% rule; and processes need to be in place or established to follow specific guidelines around the impact sanctions can have on investment activity.

In articulating the challenge as part of the webinar, Jeff Bellemare highlighted that ownership can be removed two or three times and still affect valuations to the detriment of investors. For instance, in April of last year, Russian Oligarch Oleg Deripaska was sanctioned under an executive order. As he was the majority shareholder of EN+ and Rusal, both entities were added to the OFAC sanctions list. Following board restructurings, Deripaska reduced his ownership stake and the sanctions were ultimately lifted.

The risk to investors, however, could be seen in the share price of EN+, which was never delisted from the London Stock Exchange. Beyond diminishing liquidity in the stock, the price of securities never fully recovered, even after the sanctions were removed.

This also highlighted the risks that exist even on major exchanges, as companies with a global reach can be sanctioned even if they’re not necessarily domiciled in markets that would otherwise give investors pause.

Managing the Data
The challenge, though, isn’t just tracking this information, and is far more extensive than simply monitoring the sanctions that are issued and reversed. As political events occur, lists must be kept up-to-date as regulators respond. Additionally, data scrubbing is required to ensure accuracy. For instance, compliance doesn’t solely track new sanctions that are imposed. They need to be aware of how corporate actions or capital increases can influence ownership; they also need to be aware of M&A or management changes; they must track different regulators across many different jurisdictions; and they must then validate triggered sanctions – all in a timely manner to avoid or minimize the potential impact to the portfolio.

These mounting challenges – that have consistently increased – speak to Eagle and SIX’s expanded alliance to assist clients as they navigate this sea of change.

Although the sanctions landscape is volatile and ever-changing, SIX in conjunction with the Eagle solutions, can help asset managers and asset owners keep track of developments happening 5,000 miles away that might otherwise escape the radar.

To learn more, view the webinar recording.

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