GC Friday Interview: Linedata’s Matt Gibbs on Sanction Compliance

No one can turn on their nightly news program without hearing about various national governments imposing a new round of sanction or counter-sanctions in a tit-for-tat fashion. As a foreign policy tool, sanctions save more lives than engaging in actual hostilities, but they leave asset managers and custodians in a bind. Matt Gibbs, a product manger for Linedata’s pre- and post-trade compliance offering, comments on how they can navigate this economic mine field.
By Rob Daly(2147487629)
No one can turn on their nightly news program without hearing about various national governments imposing a new round of sanctions or counter-sanctions in a tit-for-tat fashion. As a foreign policy tool, sanctions save more lives than engaging in actual hostilities, but they leave asset managers and custodians in a bind. Matt Gibbs, a product manger for Linedata’s pre- and post-trade compliance offering, comments on how they can navigate this economic mine field.

GC: Has the industry seen a rise in the number of economic sanctions with which asset managers and custodians need to comply?

MG: Obviously, there are the long-running running sanctions against some nations like Cuba and Syria. Then there are the newer ones, such as the ones related to the situation in the Ukraine and Russia. I’d say that there are not more sanctions, but the ones we have today are much more advertised than they had been in the past. The extent and the details of the newer sanctions have changed a little bit too. They are much more descriptive and directed to what is legal and illegal to do.

GC: Is the time between governments imposing sanctions and when they go into effect shrinking at all?

MG: It really depends on the individual sanctions. If you look at the sanctions against Russia because of the Ukraine, those are already in force. But we are already on the third iteration of them. That was quite a tight period. Given the technology that the industry has at its fingertips, it can actually implement them much quicker.

If you look at the US Treasury’s lists of individuals and entities with which you cannot do business because of certain sanctions, they are are all available in .CSV or HTML file formats, which are a good format to import into your compliance systems.

Whether you have to observe sanctions against Cuba, Iran, Russia or Syria, it does not make much of a difference if you can operate from a consolidated list that you can import to your pre- and post-trade compliance platforms. As long as the compliance platform can support the multiple formats in which the sanction data comes, observing a new sanction is just another thing a firm needs to bear in mind.

This really is not additional work. It just is just an addition to the group of entities with who you cannot do business. It’s not too bad. Yet, I believe that the bigger concern will be on the custodial and private wealth fronts. This puts a lot of pressure on and raises the difficulty of the “know your client” (KYC) process. It is no longer a simple question of asking whether you can be an equity- or money market counterparty when discussing individual people.

GC: Who typically is responsible for entering sanctions data into a company’s compliance platform?

MG: Our approach is to give the custodians, asset managers and private wealth managers the tools to take the information from wherever they see is the best place from which to take it. The reason why we do it this way round is that we have services that keep such global disclosure data up to date. We partner with a law firm to facilitate that so we can always be sure that we are getting good information through.

This allows our clients to import the data into their consolidated lists, which they might source from their national regulators. If I was in the US, then it would be the US Department of the Treasury.

GC: Are there any major changes in how asset managers and custodians handle sanctions on the horizon?

MG: I’m not aware of any major changes. Sanctions by their nature are pretty political. It usually is an individual act that tends to kick things off, which makes them difficult to pre-guess.

Of course, we already have seen a major change in regulatory compliance as regulators have been moving towards individual accountability over the past few years.

It started around 2007 and 2008 when regulators began to insist that organizations naming an individual rather than a compliance or client administrative team to be responsible for certain things. They want one name who would they could name, shame and speak to if something goes wrong.

This is a very different culture to the asset management community. We are not used to this “name and shame” environment.

GC: How has the asset management community responded to this change?

MG: At the beginning, they had questions about who should employee this person. If the individual is a regulatory person sitting within their organizations, should not the regulators pay the person’s salary? However, I think that was people playing the devil’s advocate with the regulator.

The people with these responsibilities were trained to a high degree and now are trained to a much higher degree. As head of all the regulatory changes, they have to be much more pro-active concerning what is happening in the industry, especially with the regulatory changes that have occurred in the past four to five years. This period has had the greatest amount of change that I can remember. These changes also had quite tight deadlines that have lead to those responsible being more pro-active and changing their team structure as well as how they interact with their technology team all across the board.

GC: What is the most common pain point for asset managers and custodians when it comes to observing sanctions?

MG: The major issues are avoiding fines and those sorts of things. The biggest pain point is the grey areas. Getting more information is important. It is all very well and good to receive a list of people of which firms need to be wary, but how do you react to things like accounts of spouses and children? Most of that information is laid out already.

Getting data concerning entities is pretty easy. With the recent sanctions against Russia only mentioned five banks. Firms just need to be aware of which institutions that these banks have more than a 50% ownership. This information is relatively clear-cut.

More on the regulatory side, it is also keeping up with the speed of regulatory changes. In the past five years I would say that all of the internal costs of hedge funds and asset mangers, except for a very slight percentage, has been spent on regulator compliance and not improving investor performance.

I’m glad to say that our US clients show signs of putting resources back into investor performance. However, in Europe and across Asia, there are still a lot of regulations coming out. In Europe, it is a big year for EMIR and MIFID so European firms are spending most of their money than on improve their clients holdings.

GC: Do you see these issues changing much in the next year?

MG: Regulation will still be here. There never seems to be an end to it. Just as you clear one hurdle another one arises. We are seeing the changes becoming relatively smaller and more manageable. In 12 months I expect that our American client base would be concentrating on what should be there day job and that our European clients gradually moving in the same direction. Our Middle East and Asia-Pac clients would be following somewhat later. There still will be compliance projects kicking around, but they will not be as all encompassing as they have been in the past five years.

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