Import and Export Restrictions: A New Consideration for Compliance and Risk Assessments

Compliance experts are already working at full capacity to map the effects of current financial sanctions. The number of sanctions is constantly increasing and the associated processes are complicated. But there is more to come. Investments in companies that face import and export restrictions are increasingly coming to the attention of supervisory authorities and the public. This is accompanied by corresponding potential risks that these trade restrictions could eventually lead to financial sanctions.

As discussed in our 2023 article, the sanctions compliance and risk assessment processes of financial institutions involve the careful analysis of potential clients, existing clients, or transaction partners. The goal is to identify a possible exposure to financial sanctions levied by one country against other self-governing states, individuals, or companies. Financial sanctions commonly take the form of a ban on investing in securities issued by the sanctioned entities. The aim is to throttle their capital inflow.  

A financial institution’s failure to comply with financial sanctions can result in financial, legal, and reputational repercussions. For this reason, the work is as crucial as it is complex and dynamic; complex, because sanctioned entities go to great lengths to circumvent sanctions or hide their involvement, and dynamic, because new sanctions emerge regularly.

In fact, an analysis conducted with the SIX Sanctioned Securities Monitoring Service – a service used by financial institutions to assess their exposure to sanctioned securities – revealed that the total number of sanctioned securities increased by almost 700% from January 2022 to March 2024.

Import and export restrictions – closely aligned with financial sanctions in their shared goal of throttling resources to specific entities – have taken center stage following a recently published report from a US Congressional Committee. The committee found that BlackRock and MSCI had facilitated more than 6.5 billion US dollars of capital flow via investments into entities that are blacklisted or red-flagged for import and export. The United States levied the respective trade restrictions because the entities were deemed a security threat.

Acknowledging that investing in securities linked to entities targeted by the US government is legal, the committee urged congress to act on their recommendations to restrict investment into the companies, their subsidiaries, affiliates, parents, and holding companies. In short: to financially sanction the entities that are presently blacklisted or red-flagged for import and export. 

Given the intense scrutiny from US lawmakers, financial institutions face huge reputational risk by investing in securities linked to entities that are blacklisted or red-flagged for import and export, despite its legality. The US has imposed on average more than 35% of all sanctions between 1950 and 2019.

There is no way to definitively predict if the recommendation from the US Congressional Committee will eventually make its way into legislation. In part, this is due to a rapidly shifting geopolitical landscape and an upcoming administration change in the United States.

Depending on their risk appetite, it may be prudent for financial institutions to assess their exposure to entities subject to import and export restrictions.