Sanctioned Securities Screening: Safeguarding Securities Trading and Investment Management Firms

Banks, traders, and investment management firms face growing exposure to risks associated with sanctioned securities, or assets linked to individuals, entities, or jurisdictions targeted by international economic sanctions regimes. These risks stem from evolving sanctions programs, the challenge of identifying hidden ties to restricted parties through complex and opaque ownership structures, and the dynamic nature of international regulations – and they aren’t always visible at first glance.

This makes real-time, data-enriched screening not just valuable, but critical, for both compliance and informed decision-making.

Sanctioned Securities and Why They Matter to Investors

Sanctioned securities refer to financial instruments – such as stocks, bonds, derivatives, mutual funds, or exchange-traded funds (ETFs) – that are associated with sanctioned individuals, entities, or governments. These designations are issued by a range of authorities, including the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC), the Council of the European Union, the United Kingdom’s Foreign, Commonwealth and Development Office (FCDO), and other national governments and multilateral bodies worldwide.

Examples of sanctioned securities include:

• Securities issued by entities explicitly named on a sanctions list (e.g., OFAC’s Specially Designated Nationals (SDN) List)
• Securities of issuers that are majority-owned—whether individually or in aggregate—by sanctioned parties (e.g., under OFAC’s 50 Percent Rule), or otherwise controlled by such parties (e.g. EU or U.K)
• Securities linked to issuers based in, or deriving significant revenue from, comprehensively sanctioned jurisdictions
• Securities investments subject to regulations, such as the Chinese Military-Industrial Complex (CMIC) Sanctions Regulations

These instruments pose dual risks. Compliance violations – resulting from holding or trading sanctioned securities – can lead to regulatory penalties, frozen assets, or forced divestments. At the same time, investment risks arise as these securities may become illiquid, devalued, or difficult to offload, leading to potential losses for holders.

In addition to trade restrictions, regulators are targeting capital markets, recognizing that allowing investment in sanctioned or high-risk entities can dilute the impact of sanctions.

Programs like the CMIC securities investment ban and the proposed Outbound Investment Security Program (OISP) are not traditional sanctions measures, but they reflect a growing regulatory focus on restricting financial exposure to entities tied to foreign military, surveillance, or dual-use capabilities. While distinct, these frameworks share underlying risk drivers with sanctioned securities regimes, making rigorous screening across both domains more urgent than ever.

Understanding the Risks of Sanctioned Securities

Sanctioned securities create layered risks for investors.

Securities can be indirectly linked to sanctioned entities through complex ownership structures and control arrangements. Even when an issuer isn’t named on a sanctions list, it may still be subject to restrictions under rules like OFAC’s 50 Percent Rule, which extend to entities majority-owned by sanctioned parties, including through subsidiaries or affiliated structures that screening tools often overlook. Sanctions violations may also arise from participating in multi-layered transactions (such as via custodians or wealth managers) where ownership by a blocked party is obscured, or from providing investment-related services to parties that are either blocked or are located in sanctioned jurisdictions.

These risks aren’t limited to individual securities. Pooled investment vehicles like ETFs, mutual funds, and private equity funds can also carry exposure to blocked parties through their underlying holdings. In both cases, identifying these compliance vulnerabilities requires sophisticated screening and due diligence utilizing contextual intelligence.

The consequences of holding sanctioned securities or providing investment-related services to a blocked party can be severe, creating both enforcement, regulatory and reputational risk, as well as operational and financial burdens stemming from potential asset freezes and trading restrictions. Firms may also face scrutiny from investors or the public if they’re found to be associated – knowingly or not – with entities linked to sanctioned parties.

Case Spotlight: 2025 OFAC Settlement with Interactive Brokers LLC (IB)

In July 2025, the U.S. Treasury Department recently reached an $11.8 million settlement with one of the largest online trading platforms in the U.S., for apparent violations of multiple sanctions programs tied to its brokerage and investment activities.

While some violations stemmed from deficiencies in customer screening, others highlighted gaps in how securities were screened and how the firm handled sectoral sanctions. The case marks the first public OFAC enforcement action with a significant securities component, reinforcing the agency’s expectation that sanctions compliance extend fully into capital markets activity.

OFAC noted that the penalty, well below the potential maximum of $60.1 million, reflected the company’s voluntary self-disclosure and substantial cooperation during the multi-year investigation.

Penalty
USD 11.83 million (non-egregious, voluntarily self-disclosed)

Conduct
12,367 apparent violations (2016 – 2024), including:

• Exporting brokerage & investment services to customers in Iran, Cuba, Syria, and Crimea
• Processing trades in securities subject to the Chinese Military-Industrial Complex (CMIC) program
• Funds-transfer services involving blocked Russian banks after designation under E.O. 14024

Why it mattered

• IB’s omnibus clearing model meant U.S. market participants lacked visibility into end customers.
• Geo-blocking and IP-address controls had gaps that let sanctioned-jurisdiction users trade and move funds.
• Demonstrates how on-platform service “exports” can violate OFAC rules even when no physical goods move.

Compliance takeaways

• Look through the service chain. Omnibus or omnibus-like structures require controls that surface the ultimate client or beneficial owner before any trade is executed or cleared.
• Screen securities, not just customers. Integrate CMIC, 50 Percent Rule ownership data, and other program lists into real-time symbol/ISIN screening—including margin-liquidation and automated order-routing flows.
• Audit geo-controls continuously. IP-blocking and jurisdiction filters should be penetration-tested and independently validated; minor bugs can enable thousands of violations.
• Leverage timely, battle-tested intelligence. Automated data feeds that map newly designated parties to majority-owned issuers within hours—backed by source documents, program tags, and ownership pathways—let institutions update restricted-securities lists promptly and maintain audit-ready records.
• Map program overlap. A single instrument can trigger exposure under OFAC, EU, U.K., and other rules; a unified data layer prevents one lapse from cascading across regimes.
• Proactive disclosure pays. Early discovery, voluntary self-disclosure, and swift remediation can significantly reduce enforcement penalties.

Keys to Sanctioned Securities Screening and Compliance

A comprehensive sanctioned securities compliance program should include:

• Issuer and sanctioned ownership screening: Having a detailed and comprehensive view on which securities are impacted by sanctions is essential to avoid violations. If you are relying on a third-party vendor, ensure that they have the requisite resources and in-house expertise on sanctioned party ownership and issuer matching.
• Understanding sanctioned jurisdictions: For jurisdictions subject to layered investment restrictions, such as Russia and China, it’s critical to identify issuers that may be impacted due to ownership by sanctioned parties or designation under targeted securities bans. Get ahead of the curve with data that provides visibility on which companies are directly or indirectly impacted by sanctions, export controls, military end use restrictions, and human rights programs – whether that exposure stems from supplier or customer relationships, joint venture partners, or evasion activities.
• Interrogating fund holdings: Exposure to sanctioned securities can come through ETFs and mutual funds. Ensure that you have the ability to review underlying fund holdings to screen securities against comprehensive lists of sanctioned issuers.
• Continuous monitoring: Sanctions lists and ownership structures change frequently, so you need to continually refresh your data sources.
• Data enrichment: Relying only on list-based screening will miss the identification of potential exposure. Comprehensive, in-depth data – incorporating the mapping of complex, transnational ownership structures – enables teams to surface hidden risks and reduce false positives that slow down investigations.
• Tool integration across workflows: Effective securities screening must integrate with existing processes, including sanctions screening and portfolio management systems. Pre-trade screening helps prevent new exposure at the point of execution, while post-trade monitoring supports timely remediation if risks are identified retroactively.
• Cross-team coordination: Collaboration between compliance, portfolio management, and other relevant functions is vital to success.
• Intelligence-led support: Kharon’s Sanctioned Securities solution is trusted by leading financial institutions throughout the world and recognized as a best-in-class resource for navigating complex investment restrictions, delivering faster, deeper, and more confident compliance outcomes.

Navigating Global Securities Investment Regulations

One of the most challenging aspects of sanctioned securities compliance is adhering to requirements across global markets.

Although international bodies such as the Financial Action Task Force (FATF) offer best practice guidance regarding securities sector risk, sanctions regulations still vary by jurisdiction, forcing globally active firms to abide by different requirements in each market.

Sanctions-related securities restrictions vary across jurisdictions, including the U.S., EU, U.K., Canada, Singapore, and others, each with different thresholds, definitions, and enforcement approaches. Below, we highlight how the U.S. and EU frameworks illustrate key points of divergence.

U.S. Securities Investment Regulations

OFAC administers and enforces U.S. sanctions programs, using asset blocking and other restrictions to advance U.S. foreign policy interests or national security goals.

OFAC also administers the 50 Percent Rule, which deems any entity owned – individually or in the aggregate – 50% or more by parties on the Specially Designated Nationals (SDN) List to be a blocked person.

Other U.S. regulations restrict investment in publicly traded securities of companies identified as operating in China’s military-industrial complex and prohibit new investment in Russia.

EU Securities Investment Regulations

The EU maintains a robust sanctions regime covering a range of programs that include restrictions on trading securities of sanctioned entities as well as of entities owned or controlled by them.

The EU maintains a rule similar to the OFAC 50 percent rule, but diverges from OFAC in also incorporating blocking requirements based on control. This provision evaluates control, influence, and affiliation on a case-by-case basis.

Making Sanctioned Securities Screening a Strategic Compliance Priority

Sanctioned securities risk isn’t up for debate – it's a clear, binary compliance issue with high stakes. Yet many investment and risk teams still rely on outdated tools and manual processes that miss exposure until it’s too late.

Kharon enables organizations to both respond rapidly to new sanctions listings and proactively assess potential risk through the identification of issuers subject to sanctions and their subsidiaries. By surfacing elevated-risk issuers before headlines break, Kharon gives risk management teams the foresight they need to protect portfolios and operations from downstream exposure.

Using state-of-the-art technology and a proprietary research methodology, Kharon’s early insights empower compliance teams to automate workflows, reduce false positives, streamline investigations, and reallocate resources more efficiently to achieve greater speed without sacrificing accuracy.

These insights also support sustainability alignment by ensuring portfolios avoid ties to human rights violations, transnational criminal organizations, or other controversies. It better protects investment performance by preventing losses from frozen or unsellable assets, and helps firms avoid regulatory penalties, investor pressure, or reputational fallout from association with sanctioned entities.

In today’s environment, where securities exposure can carry immediate regulatory and reputational consequences, firms can’t afford to wait. Kharon’s 50-Plus Rapid Response delivers timely, high-confidence insights that map newly listed entities to majority-owned issuers, helping teams meet the moment with speed and certainty.

Sanctioned Securities Screening with Kharon

Navigating the complexities of sanctioned securities screening demands a proactive and insightful approach that moves beyond the list-based checks and limitations of legacy systems.

Kharon’s data equips investment managers, compliance officers, and risk teams to:

• Detect securities linked to sanctioned entities, including through complex beneficial ownership
• Reduce false positives, so compliance teams can focus on genuine threats
• Monitor data in real time thanks to seamless integrations into existing workflows

Furthermore, Kharon’s data:

• Delivers curated, context-rich intelligence backed by full transparency – showing underlying primary sources, applicable sanctions programs, relevant general licenses, and ownership pathways – freeing teams from time-consuming investigations and accelerating confident risk decisions
• Integrates with all major screening platforms and systems
• Contributes to establishing credible and sustainable policies, procedures, and controls on sanctioned securities that can be broadened to align with possible expansions to the scope of investment restrictions.

With Kharon’s Sanctioned Securities solution, leading financial institutions, including Tier 1 banks, have identified potential exposure and taken action in line with evolving regulatory guidance, helping to mitigate compliance and reputational risks.