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Enterprise risk management

Moody politicians & geopolitical risk can challenge compliance around the world

Geopolitical tension is fast becoming a destabilizing force to business environments around the world.

In recent months and years, geopolitical spats have caused business disruptions such as higher operating costs, unpredictable shifts in compliance obligations, and even outright bans on business activity.

Geopolitical risks are no longer contained within countries traditionally regarded as politically unstable or war-torn. In fact, the fallout from an ongoing diplomatic dispute between Saudi Arabia and Canada has resulted in a series of unforeseen consequences for multinationals and financial institutions caught in the crossfire.

Last year, government officials in Saudi Arabia and Canada locked horns over commentary that was posted on Twitter by the Canadian Foreign Minister, Chrystia Freeland. Government officials in Saudi Arabia reacted swiftly to the social media posts by imposing retaliatory measures. These measures included trade bans, commercial restrictions, and severance of diplomatic ties.

The central bank and state pension funds in Saudi Arabia also disposed of their holdings in any Canadian equities, bonds, and cash holdings. Plans for new trade and investment from Saudi Arabia to Canada were also stalled.

The diplomatic dispute created uncertainty over whether additional punitive measures could be introduced that would impact business activity.

Countries face off

The Canadian government has separately engaged in verbal scuffles with U.S. President Donald Trump’s administration, resulting in less drastic but still relevant geopolitical risk for businesses.

Diplomatic relations between Canada and the United States have become increasingly strained over the past year. Tensions reached a peak after the Trump administration announced that it would impose a series of tariffs on Canadian steel and aluminum. The Canadian government responded by introducing punitive measures on American goods. Further, rocky negotiations  over the ratification of the United States-Mexico-Canada Agreement (USMCA), which was put forth to replace the North American Free Trade Agreement (NAFTA), have further strained relations between the two governments over the past year.

Canada and Mexico are not the only countries that has been affected by geopolitical uncertainty initiated by the United States. The Trump administration has abruptly changed sanctions laws in recent months and years, resulting in an environment of constant uncertainty, creating immense challenges for compliance professionals at financial institutions around the world.

Financial institutions with an international presence have been caught in a crossfire between regulators which has undoubtedly posed challenges for compliance with sanctions obligations.

Following the decision by the Trump administration to reinstate sanctions against Iran, for example, regulators in the European Union have introduced legislation to mitigate the effect of U.S. sanctions by protecting European business that deal with Iran. The measures, which forbid EU persons from complying with U.S. sanctions, gives firms the ability to sue in court to recover potential damages from parties who withdraw from contracts due to U.S. sanctions.

However, the United States remains steadfast in its determination to impose and enforce sanctions against Iran. For financial institutions, violating sanctions places them at risk of heavy fines, administrative penalties, reputational damage, and even the threat of having regulatory licenses revoked.

Compliance considerations

Geopolitical risks are posing a bigger threat to businesses around the world. Corporations find themselves increasingly at the mercy of the mood of the day of the politicians that run their countries. Over the past two years, geopolitical developments have manifested themselves in the form of unpredictable tariffs, uncertainty around the direction of regulatory developments, and other unforeseen retaliatory measures.

Businesses must contend with the fallout of these political actions on their operations, supply chains, and vendor relations. Risk and compliance officers must re-evaluate mechanisms for monitoring geopolitical risk, particularly in regions that were once regarded as low risk and are not usually considered hotbeds for geopolitical disputes.

As a result, compliance professionals need to consider how to mitigate geopolitical risks relevant to their companies. Multinationals in particular may need to consider whether they should retain board members with practical experience in high-risk countries. Beyond a knowledge of the country’s political climate, these experts should have hands-on experience working and managing employees on the ground. Alternatively, businesses can also consider retaining external consultants with the necessary expertise to advise the board.

Business-continuity planning for companies in all industries is also important. Testing any continuity plans against extreme scenarios including trade bans and embargoes should be regarded as essential.

In the financial industry, compliance officers face challenges pertaining to sanctions compliance as new political disputes erupt and trigger new compliance obligations. Financial firms need to maintain compliance systems that are nimble enough to accommodate sudden changes as well as to demonstrate revisions made to ensure compliance with any new sanctions.


This article was written by Helen Chan, a Regulatory Intelligence Expert for Thomson Reuters Regulatory Intelligence.

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