Navigating Turbulent Changes to the Sanctions Landscape

“We’re living in a boom time for sanctions,” Stephen Brosnihan, Regional Director, Sales Support Operations for North America at SIX, told NICSA members during a recent #WebinarWednesday session.

The event, in which panelists explored how to reduce operational risk in the face of evolving economic sanctions, also featured experts from Bureau van Dijk and Charles Schwab.

“There are 4,747 sanctioned securities listed across all global exchanges,” Brosnihan said. “On average, over 65 new sanctioned securities are issued on a monthly basis, and close to 40 existing instruments change status from nonsanctioned to sanctioned.”

At the same time, Brosnihan said identifying sanctioned securities is now more difficult than ever. To that end, he said many of the top 50 global banks have been fined millions of dollars, with the highest penalties reaching nearly $9 billion.

“Trends suggests that these numbers will continue to increase,” he said. “Sanctioned issuers continue to issue instruments at a high pace, particularly in Russia. It’s all very dynamic, and from an operational and a risk point of view, investors are not always aware that the sanctions are even traded.”

OWNERSHIP CHALLENGES

Anders Rodenberg, Head of Financial Institutions and Advisory, Americas at Bureau van Dijk, a Moodys Analytics company, discussed the challenges around beneficial ownership. According to Rodenberg, OFAC’s 50 Percent Rule — which states that entities must be considered blocked if they are owned 50 percent or more (directly or indirectly) in the aggregate by one or more blocked individuals — makes it especially challenging to be sanction-compliant around securities.

“The aggregation aspect is very important because it means we have to take all ownership into account,” Rodenberg said. “There are examples of companies being owned with 49.5 percent and then another sanctioned entity owning something with 1 percent — and then it would become sanctioned as a whole. We could actually rebrand the 50 percent rule to the 0.1 percent rule because we now have to look at all ownership in the world in order to be sanction-compliant.”

And while identifying ownership is complicated in itself, Rodenberg said dynamic changes further complicate the process. “According to some of our statistics, on average, more than 6.5 million entities change ownership per month,” he said. “That means, by the end of this hour-long webinar, more than 7,000 companies would’ve changed the ownership, with the potential of some being sanctioned.”

COMPLEXITIES IN TRACKING SANCTION SECURITIES

Maintaining a clear view in this turbulent sanctions landscape requires that a wealth of data are linked and analyzed. In addition to regulatory updates and beneficial ownership, Jeff Bellemare, Senior Data Consultant at SIX, said this information should include company structures, corporate actions, and underlying securities.

“Companies need to follow multiple sanctions regimes based on the locations where the business is conducted and research ownership structures to identify additional companies based on the 50 percent rule,” he said. “And, with the advent of sectoral sanctions, specific rules around investments need to be adhered to, which brings about the need for additional datasets.”

Keeping databases current for pre- and post-trade suitability is a challenge and poses a significant risk. “Generally speaking, there are over six and a half million active securities, 65,000 public companies, 220 million private companies and 152 million director/shareholder contacts,” Bellemare said. “In monitoring this universe for changes and updates to sanctions, securities, we see over 26,250 updates per week to data, including new instruments, reference data changes, regulatory updates, and shareholder changes.”

LOOKING FORWARD

Megan Brooks, Senior Manager, Economic Sanctions Risk & Program at Charles Schwab, said the geopolitical climate is ripe for more sanctions, specifically when used as a foreign policy tool.

“Make sure you’re managing your risk appropriately and that you’re staying abreast of what’s happening in the world,” she said. “If you can see what’s coming down the pipeline, you can limit risk as necessary.”

Because OFAC tends to announce sanctions on Friday afternoons with the expectation that firms will have implemented actions by the start of business on Monday, Megan said it’s important to establish key lines of communication ahead of time.

“You need to have people already in line who expect that if you send out a call, they’ll need to take quick action,” she said. “If you have not already set kind of those lines of communication and those expectations up with your business partners within your firm or your business, it can create additional challenges.”

 

NICSA thanks SIX for sponsoring this webinar. 

Note: Although the observations contained in this work represent the best thoughts of the individuals comprising the NICSA panel, they do not necessarily reflect the views of NICSA or any of its member organizations. Matters addressed in this work may touch upon legal or regulatory matters, however nothing herein is intended to be or should be construed as legal advice. You should contact your own counsel in order to obtain legal advice regarding these or any other matters.



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