Staying on top of sanctions: A data driven approach

Increasing complexity, regulatory rigor, and the inconsistent nature of global sanctions regimes are raising the bar for compliance officers. Getting it wrong can be costly. The prospect of fines and forfeitures for sanctions breaches is substantial and growing, especially for those who transgress U.S. legislation. When a major European bank was fined $1.3 billion in 2019, it was another reminder of how closely intertwined global markets and sanctions have become.

Financial services institutions are taking note and have increased compliance spending in their efforts to reduce the risk of fines. However, sanctions compliance is far from straightforward as requirements evolve rapidly. Quickly and proactively assessing exposure to securities prior to trading, or potential counterparties prior to transacting, can be overwhelming. To remain both vigilant and effective, compliance teams need comprehensive and timely sanctions data that helps them automate screening of entities and securities.

A recent example of the expanding sanctions data challenge is U.S. Executive Order (EO) 13959, which took effect on January 11. EO 13959 and established prohibitions on transactions by U.S. Persons relating to holdings of the underlying securities of companies identified by either the U.S. Department of Defence (“DoD”) or the U.S. Department of the Treasury (“Treasury”) to be “Communist Chinese military companies,” and their subsidiaries with closely matching names. These new sanctions placed restrictions not only on securities, but also on indirect investments such as fund investments that have any exposure to sanctioned securities, adding to the complexity of compliance.

Screening Funds for Sanctioned Securities

Screening securities is already difficult for many firms, and screening funds increases this task exponentially. With hundreds of thousands of funds and underlying unique security positions, gaining access to timely fund constituent data becomes a major operational task for the compliance team.

The ETF market continues to expand and each fund has many unique underlying constituents each of which will need to be assessed for the purpose of sanctions compliance. Firms that have any ETF holdings will need to depend on their compliance team to account daily for each underlying constituent security – which without process automation and reliable sanctions and fund holdings data would be a very difficult and risky process to manage.

Data Driven Sanctions Screening

As sanctions can quickly change in scope and complexity, compliance teams increasingly need a trusted partner to help them source verified and timely sanctions data to promote an efficient automated compliance program.

To help our clients maintain up-to-date information for screening funds, Bloomberg has introduced the EO 13959 Sanctions Fund Exposure file. This file covers public funds globally with more than 280,000 funds analysed on a daily basis for potential exposure to securities impacted by EO 13959. This file is supported by Bloomberg’s fund holdings data covering over 500,000 fund constituents.

The EO 13959 Sanctions Fund Exposure file includes only those public funds covered by Bloomberg.  In addition, the file reflects information as of the last holdings reported by the fund, does not reflect real-time updates to holdings and excludes funds for which holdings information has not been updated within 180 days.

The EO 13959 Sanctions Fund Exposure file is an integral part of Bloomberg’s sanctions data solution that covers 10 sanctions regimes, including the United States, United Kingdom, European Union, United Nations, Canada, Switzerland, Japan, Australia, Hong Kong, and Singapore. These data solutions provide the sanctioned status of tradable securities, legal entities and certain public funds in the world’s leading markets in a timely and consistent manner, enabling pre-trade screening and post-trade compliance checks.

Ultimately, sanctions represent a significant regulatory risk that cannot be ignored and need to be managed. A data driven approach combined with proper workflows, processes and controls can help to mitigate the risks substantially.

For more information on Bloomberg’s EO 13959 Sanctions Fund Exposure file, please contact your sales representative.