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Challenges Posed by New Sanctions

SIX’s Oliver Bodmer discusses difficulties companies face in navigating compliance matters associated with the flurry of U.S. sanctions posed this year. He shares insights in particular on challenges within the M&A space, as well as on the complexities when pursuing and closing transactions with companies with unique holdings.

We’re only part of the way through 2018, but this year has already presented a whirlwind of challenges for sanctions compliance. So far, the U.S. Treasury has announced sanctions on six of the 92 powerful Russian oligarchs originally identified under CAATSA section 241 as potentially sanctioned individuals, as well as additional sanctions following the alleged cyber hacking of the U.S. presidential election. The complications are felt across the board, but perhaps most keenly by the teams attempting to broker mergers and acquisitions who will no doubt be seeing levels of necessary due diligence sky rocket.

Governments find sanctions to be effective foreign policy tools for targeting powerful institutions, corporations and individuals operating in specific economic sectors of any given country. But global financial institutions say complying with the proliferation of U.S. sanctions activity is burdensome and demanding. Compliance teams must store and analyze massive amounts of constantly changing data associated with the underlying structure of a security and its shareholder value while remaining current on all corporate actions that may change the status of the instrument.

So, if it’s hard enough for long established financial institutions to keep up with sanctions compliance, imagine the complications at play for those trying to broker mergers and acquisitions. Entering into business with sanctioned organizations can lead to huge fines and reputational damage and acquiring a business brings with it the additional risk of taking on the liability of another company’s compliance history. With a predicted record year for M&As globally, it’s imperative that the teams brokering these deals adapt to changes.

Smart financial institutions understand that it is not enough to simply be aware of potential sanctions, as well as those which might affect companies they are looking to acquire. It is equally important to have systems and processes in place to accurately gather and translate voluminous amounts of financial data to track risky securities and safeguard client portfolios. When institutions receive indications that individuals or businesses are likely to be subject to upcoming sanctions, they need to be able to act. Being ahead of the curve on sanctions is essential for responding quickly and effectively, particularly when looking to acquire, or merge with, another organization.

Institutions and M&A brokers must also be prepared to deal with the ripple effect caused by the U.S.’s use of secondary sanctions against companies that do business with Iran. Because of these sanctions, foreign organizations that have significant relationships with targeted entities in Iran may themselves become subject to U.S. sanctions, causing reverberations across the global financial system. Institutions must track exposure not only to the instruments affected by primary sanctions, but also to other institutions that are heavily involved with the sanctioned entities. This vastly expands the slate of instruments that must be monitored in order to stay ahead of the curve. While the EU has floated the idea of a counter-secondary sanction law that protects EU businesses, firms still need to respect secondary sanctions for the moment to be on the safe side. At the very least, they must be aware of these sanctions in order to balance between U.S. and Iran trade relations.

The flurry of sanctions activity over the last few months represents another challenge and opportunity for institutions to address their data and processes as well as those they might be looking to acquire or merge with. Financial institutions operating globally are inherently subject to geopolitical risk and reward, and no risk is quite as obvious as sanctions noncompliance. The confluence of sanctions against Russia, with its highly liquid market and, now, Iran, with 1,000 sanctioned entities and more than 860 sanctioned financial products, prove that access to an all-encompassing, continuously updated database of potentially affected instruments is critical for transparency when undergoing an M&A deal.

While sanctions compliance is complicated, the consequences for institutions that drop the ball, or merge with or acquire those who have, are all too well-known: fines, reputational damage and squandered trust. And no matter how complicated sanctions regimes become, market actors will still expect perfection from the institutions with which they do business. Even as conditions become increasingly adverse, compliance teams will need to maintain a spotless record, lest they cause lasting damage to their institution’s image.

Doing this requires easy access to the data linked to affected entities. Having a real-time view on risk exposure and the ability to react quickly to further regulations is key to enabling institutions to gather and translate data associated with sanction rules, beneficial ownership, securities information and corporate actions. In today’s volatile sanctions environment, such capabilities need to be a part of any M&A due diligence. With the number of M&A deals set to continue to rise, only institutions who are armed with the right tools will be able to avoid compliance breaches and navigate the ever more complex geopolitical landscape.

Editor’s note: This post contains updates to the article initially shared on July 3, 2018.

Oliver Bodmer

Oliver Bodmer is a Senior Product Manager in the Financial Information division at SIX, based in Switzerland. He leads SIX’s proposition and product development in the areas of KYC, AML and sanctions. In recent years, he has directed numerous client implementation projects in these areas.

Prior to his engagement at SIX, Oliver worked in the headquarters of a major banking group and spent time with large international technology corporations, where he used his experience from an assignment at the Swiss antitrust department.

Oliver has a master’s degree in economics and an Executive MBA from EPFL Switzerland and the University of Texas at Austin.

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