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Watch Out!

This week, the WSJ reported that trade sanctions were placed on dozens of Chinese firms in the last week. While the term ‘sanctioned’ might be construed as a prohibition on dealing with the entity in its entirety, the reality is more nuanced.  Last week’s trade sanctions were implemented by the U.S. Department of Commerce and aims to restrict the sanctioned entity “from receiving certain goods made or designed in the U.S.”

Yet, such designations have real tangible consequences for everyone involved from the entity itself to the financial institutions dealing with them.

In addition to the reputational risks associated, such a designation is certainly an indicator of risk - and one Sigma has incorporated into its platform earlier this year. According to the WSJ, entities sanctioned by the Commerce “could also face difficulty accessing the U.S. financial system. The costs associated with vetting transactions involving U.S. goods to prohibited entities may cause some banks to stop doing business with entities on the list,” thereby de-risking them.

From the FATF to the EU and the various international and regional watch lists, the implications of each presents institutions with varying costs associated with the level of due diligence required. According to Thomson Reuters, “72% [of respondents] say they de-risk by avoiding, rather than managing, heightened risk customers,” which doesn’t have to be the case. 

With the increasing use of sanctions, including those of the Department of Treasury and State, which are all distinct in their powers, the landscape of regulatory compliance is becoming more complicated. Yet, in addition to sanctions, a designation on a government restriction list is likely to be detrimental to those involved regardless of the specific restriction. As we highlighted in our piece, ‘Kabul via Khartoum,’ a designation on a government list may have cascading effects beyond the intended target, whether its due to a misconception or, as the Thomson Reuters survey illustrates, the inability to manage the increasingly complex set of non-financial risks. This further highlights the need for nuanced risk insights,  which has been at the core of Sigma as we continue, as TechWeek describes, our “quest to redefine the way the world sees risk by standardizing and quantifying non-credit risks”.

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