Asset managers warned on sanctions compliance

Operational Risk
05 Aug, 2014

Asset managers must ensure they have a solid grasp of the evolving nature of sanctions in light of events unfolding in Russia.

The US Treasury Department’s Office of Foreign Assets Control (OFAC) prohibits US persons from transacting in new debt and new equity of certain Russian corporates, banks and energy companies issued after July 16, 2014 amid the conflict in The Ukraine.  Meanwhile, the EU has launched similar sanctions. The EU ban applies to securities issued after August 1, 2014 by several well-known Russian banks including Sberbank, VTB Bank, Gazprombank, Vnescheconombank and Rosselkhozbank.

“The sanctions imposed on Russia at present are not straightforward. Historically asset managers have focused on whether their investors are on sanctions’ lists and this role has usually been delegated to an administrator. The latest sanctions pushed by the EU and US explicitly focus on securities activities. Although trading in existing securities is permitted, it prohibits investments in new securities issued by a company that might be issuing shares trading on the London Stock Exchange (LSE), and it is essential portfolio managers and analysts recognise what they can and cannot trade. This can be done through better education,” said Thomas Bogle, partner at Dechert in Washington DC.

Despite the volatility in Russia, some managers sense opportunities in the region. “There is a lot of capital flowing out of Russian markets but sanctions are arbitrary, and policy could turn rapidly leading to capital flowing back in, and asset managers would like to be the first back in. We have been fielding calls from managers asking whether certain investment opportunities would be in breach of sanctions. This is not like Iran or Sudan where managers know the rules very clearly. Sanctions on Russia have been slightly more complex and what is more is that unlike those markets, there are a lot of investment opportunities within Russia,” commented Bogle.

The US and EU have adopted a pragmatic stance towards sanctions in that they only apply to securities issued by blacklisted companies after a certain date. “This was sensible thinking by the US and EU in that it avoided sparking a series of redemptions from firms with a heavy Russian focus. It allows managers to continue trading in the debt and equity of impacted Russian companies provided they had this exposure prior to the effective dates of the sanctions,” said Bogle.

Non-compliance with sanctions is usually a recipe for disaster. BNP Paribas was fined a record $9 billion by the US Justice Department for violating sanctions in place against Cuba, Sudan and Iran. The French bank was also banned from clearing certain US dollar transactions for one year. Meanwhile Standard Chartered was fined $667 million by US authorities for illegal money transactions with Iran and Sudan in 2013.

“Asset managers must exercise a degree of caution, particularly when investing money in the financial and energy sectors in Russia, which have obviously been targeted. The risks of falling foul of the rules are severe. While the sanctions are somewhat narrow, and I would not advise managers to avoid Russia altogether, it is essential that firms up their compliance procedures if they are operating out of Russia,” commented Bogle. 

RussiasanctionsBNP ParibasDechertStandard Chartered