In the past couple of years, the demand for advice on sanctions compliance has soared. This has mainly been triggered by the ongoing war in Ukraine and rising international tensions. Sanctions are measures that governments put in place to restrict trade or financial transactions with specific countries or companies. These sanctions are meant to pressure governments or organizations to change their behavior, but they also create challenges for businesses that must navigate the rules.
One major trend is the increase in the number of financial products, such as Exchange Traded Funds (ETFs), that contain securities tied to entities under sanctions. Securities refer to shares or bonds that represent a financial investment. According to reports, nearly 8% of all ETFs now include securities that are on the list of sanctioned entities. This is a sharp rise of 700% in the last two years. This means there has been a significant jump in the number of investments that could potentially be illegal or risky for investors. This growth is largely due to the increased number of companies and entities facing sanctions due to global conflicts and government actions.
Sanctions Impact Global Investments
The rise in sanctions has not been limited to one specific country. Many ETFs that hold sanctioned securities are based in China, the US, and Ireland. However, this doesn’t necessarily mean that these ETFs are breaking the law. Each country has its own set of rules, and while one country may apply sanctions to a company, it doesn’t mean that another country will do the same.
For example, some companies in China have been blacklisted due to their links to the Chinese military, but that doesn’t stop investors in China or Hong Kong from buying shares in those companies. Still, investors and fund managers must carefully monitor their investments to ensure they don’t accidentally violate any sanctions laws, which can lead to hefty fines.
Starling Bank Faces £29 Million Fine: A Critical Look at Digital Banking Compliance
The challenge for businesses is that sanctions laws are constantly changing, and what may be legal today could become illegal tomorrow. Different governments also have different rules, making it even more complicated for investors who want to stay within the law. The US, the EU, and the UK all have separate sanctions lists, and investors must keep track of these changes to avoid potential risks.
Risk of Unintended Violations
The rise in demand for sanctions compliance advice is also driven by the complexity of these laws. Sanctions are not always clear-cut. For example, even if a company is not directly involved with a sanctioned entity, it may still face penalties for doing business with other companies that are connected to that entities. This is called “indirect” exposure, and it makes the rules harder to follow. Companies that are advised to follow the sanctions list need to be extremely diligent in checking if their investments could be indirectly tied to sanctioned entities.
Risk Management and Legal Consequences
Risk management plays a key role in these situations. Financial advisors and legal experts help companies navigate these complicated rules to avoid violations. However, there is also a significant difference between the way sanctions are enforced in different countries. In the US, for instance, if a company violates sanctions, it can face penalties even if the company didn’t know it was doing something wrong. The US government enforces these laws strictly and may even punish foreign companies that do business with sanctioned entities, even if the foreign company has no direct ties to the US.
Old Mutual Faces R15.9 Million Sanction: A Wake-Up Call for Financial Compliance
Meanwhile, in the EU, companies can sometimes defend themselves by showing that they have made reasonable efforts to follow the rules, such as using a trusted screening service to check their investments. Even though this defense might be accepted, the risk of violating sanctions remains high, especially when the penalties for non-compliance can be very expensive.
Expensive Penalties for Non-Compliance
In some cases, businesses have paid millions of dollars in fines after accidentally violating sanctions. For example, a Swiss bank recently had to settle a penalty for dealing with entities in Cuba, which violated US sanctions. Though the penalty was lower due to the bank’s voluntary self-disclosure, it still highlights the potential financial impact of not following the rules.
As sanctions laws become stricter, the need for compliance advice continues to grow. Asset managers, in particular, have to be extra cautious about the companies they invest in, as a small mistake can cost them a lot of money. This has led to a surge in demand for professionals who specialize in helping businesses stay compliant with sanctions laws.
