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Bank to the Future: It’s Time to Think One Step Ahead on Sanctions

By Oliver Bodmer, Senior Product Manager, SIX

We all have a fascination and desire to see into the future. Some days, particularly when markets are at their most volatile, it is nice to suspend belief for a moment and think how great it would be if the Back to the Future Delorean time machine could transport us into 2050 to see which assets we should be buying, to find out whether or not the energy transition is a success, or even to find out what the lay of the land around sanctions.

Most of the time however, looking into the future is just wishful thinking. When it comes to sanctions, banks probably find themselves wishing the Delorean was non-fictional. Unfortunately, financial institutions live in the real world, as opposed to Hollywood. The reality of the real world is that they need to have good information and a strong compliance program that combines the data points that they buy from a vendor, with their internal compliance policy and risk appetite.

This is even more important today given the volume of sanctioned securities, companies and individuals affected) by geopolitical issues stretching regulatory teams whenever a swathe of new measures are introduced. As a result, for banks, compliance has become an even more complicated and resource-intensive endeavour over the past few months. Many of these newly imposed sanctions even allow wind down periods, either through so called “general licenses” or regulations allowing wind down periods to divestment.

The challenge is that as maintaining compliance with current sanctions becomes an increasingly complex task. (Attempting to predict which securities may be affected by sanctions may seem like the sort of issue that can only be solved by a fictional time machine. But failing to keep an eye on the implications of unpredictable geopolitical events due to a lack of compliance team bandwidth will serve as no excuse when a bank is caught flat-footed in formulating its response to future restrictions.

For compliance departments, allowing them to get a head start on quantifying their risk levels by flagging which investments may be affected is of paramount importance. But it’s not as simple as that. For heads of compliance already facing risk-mitigation complexities, grappling with potentially sanctioned individuals adds a further layer of complications. Firms must take care to review their exposure to securities affected by the broader set of names to ensure preparedness in the face of potential upcoming action. The presence of the list means that, in order to avoid financial consequences and reputational damage, banks must be aware and ready for compliance well in advance of further sanctions that may be issued.  This has now become the public’s expectation, and it means more work for compliance teams.

To deal with any new expectations concerning potentially sanctioned individuals, banks need to extend and strengthen the procedures they use for their current sanction’s compliance. Already, diligent financial institutions have safeguarded their businesses by ensuring their databases and processes complied with regulations well in advance of the recent sanctions, ensuring that they were aware of securities tied to the individuals named by governments.

Ensuring access to an all-encompassing database of every financial instrument potentially affected is critical for sanctions compliance. The universe of securities for which teams must now track beneficial ownership has been expanded. In many ways, the current environment around calls for more automation.

Fortunately, the resources are available for financial institutions to take this challenge and turn it into an opportunity. By effectively sourcing data and ensuring that they have streamlined and efficient procedures for tracking changes in the status of affected instruments, proactive banks can set themselves up to be a step ahead. In doing so, while they’ll will not possess the ability to look into the future, at least their sources will be available to act upon what they see.