Financial institutions would be well advised to set up processes that enable them to comply with existing sanctions - against countries and people - in the most seamless way possible and to obey new ones instantly.

We may be only halfway through 2018, but this year has already thrown a whirlwind of demands at sanctions compliance teams. Just a few weeks ago, the US Treasury announced its intention to impose sanctions on six of the 92 powerful Russian oligarchs originally identified under section 241 Countering America’s Adversaries Through Sanctions Act (CAATSA) as "potentially sanctioned individuals." The recent withdrawal of the United States from its nuclear deal with Iran has also imposed a fresh heap of regulatory obligations on compliance departments. When we also take account of American sanctions against Venezuela and an uncertain situation in North Korea, it is easy to see why compliance teams are feeling more beleaguered than ever before, especially as the reach of secondary sanctions has added a new layer of complexity to their efforts.

The foreign policy tool du jour

Western governments believe sanctions to be an effective means of promulgating their foreign policy and delight in targeting powerful institutions, corporations and individuals that operate in specific economic sectors in the countries of their choice. Globally active financial institutions, however, find the job of complying with the proliferation of US sanctions burdensome and demanding. Compliance teams are forced to store and analyse massive amounts of constantly-changing data associated with the underlying structure of this-or-that security and its shareholder(s) while also remaining up-to-date about all corporate activity that might change the status of the instrument.

Smart financial institutions understand that it is not enough to simply be aware that sanctions might exist in this or that area and make ready to comply with them. It is equally important to have systems and processes in place to gather and translate voluminous amounts of financial data accurately, the better to keep track of risky securities and keep them out of their clients' portfolios. When institutions receive clues that people or businesses are likely to be subject to forthcoming sanctions, they must be able to act.

The job of cutting ties with sanctioned Iranian businesses and banks within the allotted 180-day period is a daunting and laborious one for compliance departments, especially since they have just had to cope with another slew of sanctions against Russia. Each round of sanctions requires data-intensive work in a short period of time.

Secondary sanctions

Institutions must also be prepared to deal with the ripple effect caused by America’s use of secondary sanctions against companies that do business with Iran, which have created ripples throughout the global financial system. Because of these sanctions, foreign organisations that have struck up significant relationships with targeted entities in Iran may themselves become subject to US sanctions. Institutions must not only track their exposure to the instruments affected by primary sanctions, but also their exposure to other institutions that are heavily involved with the sanctioned entities. This vastly expands the number of instruments that they must monitor. The European Union has floated the idea of a "counter-secondary-sanction law" that protects its firms from the Americans, but firms still have to respect secondary sanctions to be on the safe side. At the very least, they must be aware of them.

The confluence of new sanctions against Russia, with its highly liquid market, and Iran, with its 1,000 sanctioned entities and more than 860 sanctioned financial products, proves that access to an all-encompassing, continuously updated database of potentially affected instruments is crucial for compliance.