Nick Holland, director of content & event strategy for FTF
In a world of shifting geopolitics, financial institutions can no longer afford to treat sanctions compliance as a secondary concern. These commonly take the form of a ban on investing in securities issued by the sanctioned entities, but this is something of a cat and mouse game as these entities work hard to circumvent sanctions or hide their involvement.
Further compounding the issue for financial institutions is the rapid growth in sanctions.
Analysis conducted with the SIX Sanctioned Securities Monitoring Service revealed that the total number of sanctioned securities increased by almost 700 percent from January 2022 to June 2024 [1].
Actions Can Have Costly Consequences
Non-compliance with sanctions watchlists can have catastrophic consequences.
The most obvious impact of non-compliance with sanctions are fines levied because of violations of national and international laws, and these are far from a token slap on the wrist.
Consider BNP Paribas’ $8.9 billion fine in 2014 for conducting transactions with sanctioned countries including Sudan, Iran, and Cuba. [2]
In this instance, BNP Paribas allegedly processed and concealed transactions related to entities in these sanctioned countries, stripping identifying information to avoid detection by U.S. authorities. For context, the fine was more than the bank’s annual income in 2013 which stood at $6.41 billion.
The general counsel for BNP Paribas at the time told the court that the bank took full responsibility for its conduct, according to a Reuters report. “There’s no question the organization will not tolerate the kind of behavior we have seen in this case,” Georges Dirani, BNP’s general counsel, said. [3]
Beyond the fines themselves for breaking laws, financial institutions can lose access to crucial markets or suffer business disruptions due to asset freezes, suspension of licenses, or loss of business with key partners. Further financial damages can come from operational costs of rectifying violations and updating compliance programs.
If the fines imposed are not enough to encourage stringent sanction compliance, the ripples of reputational damage to the trust and integrity of financial institutions can be equally devastating and far longer lasting.
For instance, in 2012, Standard Chartered was fined $667 million for violating U.S. sanctions by processing financial transactions for Iran and other sanctioned regions [4].
The bank’s CEO had to make somewhat humiliating public statements to reassure clients and investors, admitting mistakes in compliance processes, while institution faced reputational fallout not only from the media and public but also from shareholders who were concerned about the potential long-term impact on the company’s global operations.
Despite improving its compliance systems after the 2012 penalty, Standard Chartered was fined again in 2019 for violating sanctions by processing more transactions involving Iran, Syria, and Cuba [5]. This repeat offense further eroded trust and raised concerns over the bank’s ability to maintain effective controls.
In 2019, Standard Chartered issued a statement in which it accepted “full responsibility for the violations and control deficiencies outlined in the resolution documents, the vast majority of which predated 2012 and none of which occurred after 2014. These violations include the actions of two former junior employees who were aware of certain customers’ Iranian connections and conspired with them to break the law, deceive the Group and violate its policies. Such behavior is wholly unacceptable to the Group. Standard Chartered has cooperated proactively and fully with the authorities’ investigations. The Group has also conducted its own thorough accountability review and shared the results with the authorities.” [6]
The Cat and Mouse Game of Sanctions Evasion & Detection
While the warning signs are glaring for complying with sanctions from the perspective of financial institutions, bad actors are finding obfuscation within recent financial instruments.
For instance, exchange traded funds (ETFs), futures, derivatives, and other structured products can expose financial institutions to sanctioned entities without their immediate awareness due to their complex nature. Sanctioned entities may issue securities or conduct transactions through subsidiaries or shell companies, which can indirectly expose financial institutions to compliance risks without being directly aware of doing so.
However, there is also a further angle which has come to light in recent months —import and export restrictions.
In 2024, the United States House Select Committee on the Chinese Communist Party (CCP) alleged that BlackRock and MSCI facilitated more than $6.5 billion of capital flow via investments into entities that are block-listed or red-flagged for import and export.
Following a rigorous examination of BlackRock and MSCI’s Chinese investments decisions, Chairman Mike Gallagher and Ranking Member Raja Krishnamoorthi launched an investigation into the two firms, ultimately alleging that BlackRock and MSCI invested or enabled the investment of Americans’ savings into dozens of blacklisted Chinese companies.
The House committee urged Congress to act on their recommendations to restrict investment into the companies, their subsidiaries, affiliates, parents, and holding companies that are presently blacklisted or red-flagged for import and export. [7].
“The Committee and its report confirm BlackRock complies with applicable U.S. laws, this matter affects the entire asset management industry, and that Congress and the Administration must work together to create clear rules of the road for U.S. investors,” a BlackRock spokesperson told Reuters.
“Despite fully cooperating with the Committee for more than eight months, its report includes misleading assertions about index funds, including that they are ‘funneling billions of dollars’ to these entities,” added the BlackRock spokesperson.
In a statement, MSCI told Reuters that it “does not recommend or manage investments in any country or company, that an index is simply a mathematical calculation of the performance of the market and it does not ‘channel investments.’ ”
“We are pleased that the Committee acknowledges that MSCI indexes comply with U.S. laws and regulations,” MSCI told Reuters. “If Congress or other government bodies expand restrictions on investment in China as recommended by the Committee, MSCI will assess applicable changes to our indexes in accordance with our methodologies.” [8]
Emerging Technologies, the U.S. Election, and Sanctions
While geopolitical tensions continue around the world, whatever the outcome of the U.S. 2024 Presidential election, it is certain that sanctions will remain a crucial weapon in the arsenal of available tools to deter bad actors, and financial institutions will have to keep a keen eye on technological developments that may also have deep roots to sanctioned regimes.
As recently as October 2024, Reuters reported that U.S. rules that will ban certain U.S. investments in artificial intelligence (A.I.) in China are under final review, according to a government posting, suggesting the restrictions are coming soon [9].
The final rules, which target outbound investment to China in A.I., semiconductors, and microelectronics and quantum computing, are under review at the U.S. Office of Management and Budget (OMB).
Conclusion
Sanctions compliance is not just a regulatory requirement but a critical safeguard for financial organizations navigating a landscape of rapidly changing geopolitical risks and complex financial instruments.
Failing to monitor sanctions watchlists and keep pace with emerging technologies that may obscure sanctioned entities can lead to severe financial, operational, and reputational damages.
Financial institutions need to:
- Regularly monitor and update sanctions watchlists to avoid exposure;
- Invest in advanced compliance tools for faster monitoring; and
- Develop a strong internal compliance culture to prevent oversight.
Join FTF on Nov. 7th for an interactive virtual discussion, Find True North for Sanctions Compliance: AVOID EXPOSURE TO SECURITIES TAINTED BY SANCTIONS with expert webinar speakers from Schwab, SIX, and Deutsche Bank.
The discussion will examine how:
- How to avoid securities linked to entities that are blacklisted or red-flagged for import and export sanctions;
- Strategies your firm can use to track and assess potential exposure within complex instruments like options, futures, ETFs, conventional funds, and derivatives;
- How your team can handle the rapid growth of data and manual verification challenges amid rising geopolitical tensions, sanctions across jurisdictions, and issues related to inconsistent data; and
- Anticipated policy shifts following the U.S. presidential election and their impact on sanctions compliance.
Managing Data Volume: Learn to handle the rapid growth of data and manual verification challenges amid rising geopolitical tensions, sanctions across jurisdictions, and issues related to inconsistent data.
Foreign Entity Monitoring: Learn to monitor and track securities linked to government-sanctioned entities, especially in light of the recent complex October 12th OFAC directive, to ensure compliance and mitigate risks.
Election Impact: Discover how next week’s U.S. election may affect sanctions policy.
1 https://www.six-group.com/en/blog/trade-restrictions-sanctions.html
4 https://www.justice.gov/opa/pr/standard-chartered-bank-agrees-forfeit-227-million-illegal-transactions-iran-sudan-libya-and
5 https://www.justice.gov/opa/pr/standard-chartered-bank-admits-illegally-processing-transactions-violation-iranian-sanctions
6 https://www.sc.com/en/press-release/standard-chartered-resolves-legacy-conduct-and-control-issues-for-1-1bn-monitorships-terminated/
7 https://selectcommitteeontheccp.house.gov/media/letters/letters-msci-and-blackrock-investments-fueling-chinas-military
8 https://www.reuters.com/business/finance/wall-street-steered-billions-blacklisted-chinese-companies-probe-wsj-reports-2024-04-18/
9 https://www.reuters.com/technology/artificial-intelligence/us-soon-curb-ai-investment-china-2024-10-21/?utm_source=pocket_saves
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