Sanctions Screening in APAC Capital Markets

The launch of sanctions globally in response to Russia’s invasion of Ukraine has reminded buyside firms of the need for robust screening processes. Effective sanctions screening requires timely, accurate and complete data across investment and operational functions. In turn, managing the scale, volume and complexity of multi-source sanctions data relies on the right underlying technology to automate and streamline the process.

In this Insight, Peter Sherriff, Charles River’s Director of Product Strategy, delves into some of the operational data challenges associated with effective sanctions screening implementations and the processes required to manage and mitigate these risks without reducing efficiency. He discusses how partnering with trusted service providers and having the right compliance and data management technology in place is key to minimizing operational risk.

APAC sanctions tend to be driven by the US as these sanctions are extraterritorial in nature. The US Department of the Treasury’s Office of Foreign Assets Control (OFAC) administers and enforces economic and trade sanctions based on US foreign policy objectives against targeted foreign countries and regimes. Other sanctions originating at the UN, or in the UK or EU may be implemented locally by organisations including the Monetary Authority of Singapore (MAS) and the Australian Transaction Reports and Analysis Centre (AUSTRAC) or the Department of Foreign Affairs and Trade (DFAT) in Australia for example. The sanctioned individuals and entities identified by OFAC or another recognized agency must then be mapped to their associated securities and underlying instruments for use by investment managers when screening their portfolios.

Recently, the global sanctions environment has become very dynamic and increasingly complex. As the list of impacted securities grows, it makes it harder for operations teams to manage screening processes manually. As a result, many of our buyside clients are looking to operationalize compliance checks and other processes on a pre-trade basis as part of the investment process. This requires having access to the right data at the right time.

Less liquid markets create additional complexities. Firms might have an adequate pre-trade screening process in place, but over the 2 to 3 days it takes to finalize that trade, an entity could find itself on a sanctions list. Reviewing a partially completed trading position requires the ability to continuously test against the latest sanctions throughout the life of that trade. This is where next-gen investment platforms deliver competitive advantage, by supporting intra-trade intelligence as opposed to only at trade ideation or on a positional basis.

Aside from efficiently managing large volumes of data, a significant challenge for investment managers is the diverse asset mix they manage, from single securities through to the most complex structured products. Effective screening requires understanding the relationships between assets and the different parties involved. Clients are increasingly looking for ways to streamline the process of ingesting sanctioned securities data and applying it across the life cycle of trades and positions. It is becoming more common for firms to look for external partners to help them implement an efficient process, leveraging technology that can handle massive amounts of sanctions data and perform an all-encompassing screening as quickly as possible.

One of the benefits of partnering with external specialists is scale. Sanctions brought on through geopolitical events as we have seen this year and the operational overhead for individual firms to plan for and manage these events internally is large. This underscores the growing interest in options such as Data as a Service (DaaS). DaaS brings the global scale, expertise and operational footprint of trusted outsourcing partners to those oversight and governance processes. The latest technology enables real-time access, visibility, and transparency when bringing different datasets together in a manner that enables firms to understand data governance holistically.

Having a process in place ensures external providers are actively engaged in the oversight as data and regulatory actions evolve. Providing organizations with resolution of questionable data underpinned by the ability to access historical data at any point-in-time builds confidence in the screening process. The investment platform’s compliance engine consumes the list of securities detailing validated relationships between interested parties to automate the screening process.

Firms must ensure processes are properly systemized, audited, and tracked, particularly where compliance is part of the investment platform and integrated into the transactional and trading process. This requires a robust set of controls and audit trail around any of the actions that were taken.

Buyside firms need to effectively manage all of this data, and ensure they have the right validation and governance processes in place. It is difficult and costly for any firm to do this independently because it requires expertise and agility to respond quickly in the wake of an emerging geopolitical event. Having the right compliance and screening technology across the investment process is also key. It’s imperative that investment firms work with trusted partners to create effective sanctions screening and compliance processes while minimizing operational overhead.