As the complex and dynamic sanctions landscape is evolving, what are the key compliance challenges of mitigating sanctions-related risk associated to financial instruments? And how can Financial Instrument Risk Intelligence (FIRI) help?
- Sanctions are a growing challenge for financial services compliance teams as further sanctions by the U.S. and EU against Russia and China add to the complexity.
- Compliance teams need to be able to identify financial instruments subject to sanctions but this task can pose problems with the number of individuals and entities that have been sanctioned rising by 250 percent in five years.
- Screening for sanctions risk becomes even more complicated when each financial instrument issued by or linked to an explicitly or implicitly sanctioned entity is added into the mix.
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The sanctions landscape is highly dynamic, and the latest rounds of both U.S. and EU sanctions against Russia and China have added further complexity for compliance teams across the financial services arena.
These sanctions impact a broad range of financial instruments, including equities, debt securities, options, futures, forwards, swaps, indices, ETFs and funds.
Sanctions – an ancient political tool used to coerce, shame, punish or deter countries, entities or individuals – may not be new, but they have diversified in terms of both aim and form over the years. Sanctions may be explicit or implicit, and can include comprehensive embargoes, asset freezes, investment bans, travel bans, arms embargoes, export restrictions and more.
For example, investment bans aim to deprive specific countries, companies or sectors of capital, and their effect can be substantial – research published in the Russian Journal of Economics revealed a net capital outflow of $160bn-170bn between 2014 and 2017. These bans require additional, dedicated compliance controls.
Explicit and implicit sanctions
Explicit sanctions are specific lists, with the names of the individuals, organisations and/or sanctioned countries explicitly listed.
Implicit or narrative sanctions are more complicated to navigate. These sanctions don’t specifically name an individual or company (other than the main sanctioned entity), but extend to entities covered by a narrative statement on a sanctions programme.
Compliance with investment-related sanctions
Failure to identify sanctioned financial instruments can quickly result in both reputational damage and often hefty fines, but the process of identifying those instruments subject to sanctions is often far from straightforward.
This is cause for concern, since over the last five years, the sheer number of sanctions has ballooned, showing a 250 percent increase in the total number of individuals or entities that are sanctioned.
Screening as a key control
The scope of screening – which remains a key control for effective sanctions compliance – has changed in recent years, evolving from simple name checks to include a wider set of information.
While effective, the challenges surrounding screening can be many and varied.
Identifying sanctioned entities, as well as entities owned and controlled by sanctioned parties, especially where subsidiaries exist, is typically not straightforward, and the task becomes even more complicated when each financial instrument issued by or linked to an explicitly or implicitly sanctioned entity is added into the mix.
Moreover, compliance teams must also ensure that they verify whether or not sanctioned individuals enjoy beneficial ownership or have a majority ownership in terms of OFAC’s 50 percent rule. This rule outlines that any entity in which one or more sanctioned entities own (directly or indirectly) more than a 50 percent interest may also be implicitly sanctioned.
Additionally, firms need to be aware of issue dates, maturity dates and tenors, because there are instances where financial instruments issued before the date on which the sanctions took effect may be held and served, but those issued after the application date may not.
Companies must also constantly watch for status changes as new financial instruments may become sanctioned – possibly as a result of corporate actions such as capital increases – and must maintain compliance with any extra-territorial regulations that may apply to financial instruments.
We asked the webinar attendees what they are doing to address these multifaceted challenges. Watch our OnDemand webinar: How to screen securities with World-Check Financial Instrument Risk Intelligence to find out what additional controls the attendees said they would be putting in place to mitigate the risk.
Data set designed to help identify sanction risk
Refinitiv’s Financial Instrument Risk Intelligence (FIRI) data set has specifically been designed to tackle this plethora of challenges.
FIRI delivers accurate, comprehensive sanctions content for both sanctioned entities (both explicit and implicit sanctions are included) and instruments, including entities that are directly listed by OFAC and the EU; subsidiaries of these entities; and lists of instruments issued by these entities after the application of any executive orders (EOs).
FIRI is available as an opt-in content set in the World-Check Data File format and delivers instrument coverage extending to debt, equities, funds, warrants, derivatives, ETFs and indices.
Our sanctions coverage includes 280+ lists with our dedicated team monitoring all major sanctions lists on a 24/7/365 basis. The scope and scale of our coverage is doubling annually.
Our extensive global coverage can directly boost organisational efficiency, because our data is structured with keywords and comprehensive information to improve decision making. We also ensure ease of integration – FIRI data can seamlessly be absorbed into existing screening processes.
As the global sanctions landscape continues to evolve, Refinitiv remains committed to offering tangible and immediate help to organisations, and we will continue to offer best-practice solutions and accurate, trusted data to help compliance teams solve the complex data challenges that surround the process of mitigating sanctions-related risk.