Industry experts say sanctions risk is now deeply embedded in capital markets, creating complex challenges for APAC firms.

Financial institutions are grappling with a fundamental shift in the nature of sanctions risk, which has evolved from a back-office compliance function into a board-level geopolitical challenge.

Exposure is no longer just about screening counterparties or transactions but is increasingly found embedded indirectly within capital markets through passive indexes, layered fund structures, and complex ownership chains.

During a recent webinar hosted by Regulation Asia and SIX, experts highlighted the growing complexity for firms in the Asia-Pacific region as they navigate regulatory fragmentation and the overt use of sanctions as tools of economic policy.

Fragmented landscape

The sanctions landscape has transformed significantly over the last 24 months, moving beyond its traditional focus on state actors and weapons proliferation.

Claudine Lamond, former Director at the Australian Sanctions Office (ASO) and now a Senior Manager with Grant Thornton Australia, explained that sanctions are now being incorporated into enterprise risk frameworks, with geopolitical implications discussed across the entire institution, not just within compliance departments.

“It's no longer viewed as part of a compliance function, so it's no longer an add-on to AML/CTF compliance,” Lamond said. “Sanctions risk is really being incorporated into enterprise risk.”

She pointed to a diversification in the purpose of sanctions, which are now frequently used to target cybercriminals and organised crime groups. This makes compliance more difficult as these entities are already adept at operating in the “illicit, covert space”, using sophisticated layering techniques to disguise their activities.

A major challenge highlighted was the growing fragmentation among sanctioning countries. While the “Coalition of the Willing” largely aligned on targets a year ago, there are now significant divergences.

“We've now seen countries such as Australia and the EU continue with Russian sanctions, where the US have paused their Russian sanctions,” Lamond noted. “Likewise, we've seen countries like the US continue with quite advanced Iranian sanctions, but other jurisdictions haven't.”

This divergence complicates the once-common practice at firms of adopting a universal sanctions policy. While operationally simpler, such a policy now forces firms to make difficult risk-appetite decisions, potentially de-risking from markets where they have no legal obligation to do so.

Lamond described this as a growing issue for boards, who must decide how to manage sanctions risk as the list of restrictions continues to grow.

Indirect exposure rising

A key theme of the discussion was the rise of indirect sanctions exposure within securities.

Oliver Bodmer, Product Management Director at SIX, presented data showing a nine-fold increase in the volume of sanctioned securities from 2022 to the present day, with drivers including sanctions against Russia’s National Settlement Depository (NSD) and restrictions on custody and clearing.

Of particular concern is the number of investment vehicles that have some extent of sanctions exposure. Bodmer explained the mechanics of this indirect risk, where a seemingly compliant fund may hold another fund, which in turn holds a third fund containing a sanctioned instrument.

“This can be cascaded… and to some extent, that risk is getting aggregated into larger and larger investment vehicles,” he warned. This creates significant challenges, particularly as regulators in different jurisdictions have conflicting rules. For example, the EU and UK have a zero-percent threshold for sanctioned securities in ETFs, while the US has a 50 percent threshold for Russian securities.

Raymond Wong, former APAC Head of Sanctions for BNY, added that while capital market restrictions are not new, the challenge now lies in applying rules in unfamiliar legal environments.

He cited the difficulty of obtaining authentic, official information on corporate ownership structures in jurisdictions that may be relatively new to sanctions lists, use less common languages, have corporate registries that are not remotely accessible, or feature unfamiliar legal structures such as military-owned entities.

Using Cambodia as an example, he said this creates a “real challenge” for financial institutions expected to identify and block exposure within a reasonable timeframe.

Cambodia has recently been the target of a series of US sanctions actions, focusing on transnational criminal networks operating online scam centres in the country. Wong noted that, similar to sanctioned Russian oligarchs, these networks have also managed to establish and run seemingly legitimate businesses, such as banks.

Geopolitical crossfire

The panellists agreed that geopolitical tensions are adding another layer of complexity, creating direct conflicts of law for multinational firms.

Wong referenced China’s anti-foreign sanctions law, citing a case where a Chinese shipbuilder successfully used local arbitration to force a counterparty to make the final payment for a vessel and presumably take delivery, even though the counterparty was attempting to exit the contract due to sanctions imposed on the shipbuilder.

Similarly, following the invasion of Ukraine, Russia legislated locally to allow assets to be moved out of foreign-imposed blocks. “This creates a challenge to the financial institutions, because… the rightful, beneficial owner of the asset could actually go to Russia to get a legal remedy to move the asset out of your block,” Wong explained.

The threat of secondary sanctions was described as very real and unpredictable; with panellists noting that none of the entities that have been hit with secondary sanctions expected it.

Lamond described the potential impact of secondary sanctions as a “nuclear bomb” that could be “absolutely detrimental” to a business.

A modern framework

To navigate this environment, the panellists outlined the key components of a robust, modern sanctions governance framework. They said the foundation remains a thorough, data-led risk assessment.

Financial institutions are recommended against just interviewing product owners or relationship managers; rather, they should make sure their risk assessments are "truly data-led".

This extends to screening, which must go beyond just screening beneficial owners against sanctions lists. Screening should cover intermediate levels of ownership and use specific identifiers relevant to the business, such as ISINs for securities, not just names.

A recurring theme on the panel was the need for an enterprise-wide approach that breaks down internal silos. Bodmer noted that trading systems have often been independent from KYC and AML applications, but the new landscape requires an integrated compliance framework that includes the trading function.

Proactive risk management is also critical. Wong advocated for horizon scanning, including risk prediction and analysis, to identify potential future sanctions targets – be they geographies or industries – and running scenarios to develop a game plan for responding quickly.

He also recommended, if resources and expertise permit, using press and social media as a source of intelligence to identify sanctions evasion tactics that haven’t yet been covered by regulators.

Ultimately, the panellists concluded that managing sanctions in 2026 requires a sophisticated framework built on accurate data, advanced technology, continuous testing, and board-level oversight.

With more comprehensive being issued by some regulations, such as the ASO, a hope was expressed that firms will move beyond a reactive stance and build a more resilient and forward-looking compliance posture.

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Disclosure: The webinar and this article were produced by Regulation Asia in collaboration with SIX, which provides a Sanctioned Securities Monitoring Service to help firms proactively identify financial instruments affected by international sanctions.