The geopolitical upheaval of the past decade shows no signs of slowing. Russia’s invasion of Ukraine, the changing dynamics of US-China relations, and fighting in the Gaza region are pressuring supply chains, creating market-entry challenges, and increasing regulatory-compliance burdens for businesses around the world. The recent World Economic Forum Annual Meeting at Davos highlighted the pressures of these geopolitical shifts for businesses, governments, and societies, who are grappling with the need to protect growth and national security. And the Trump administration’s stance on sanctions and financial crime will have implications for business strategy and risk mitigation.
Governments have leaned especially hard on economic sanctions recently as a means to exert influence on world affairs. The United Kingdom and European Union, for example, have imposed comprehensive sanctions targeting Russian entities and sectors funding the war in Ukraine. The increasing scope and severity of the sanctions reflect the West’s determination to deter further aggression in the region.
In the United States, sanctions will once again play a key role in a second Trump administration. Despite fears that Trump will lift Russia sanctions as part of ending the Ukraine crisis, it’s not that straightforward. Depending on how Trump approaches Russia/Ukraine, more aggressive use of secondary sanctions authority against third countries trading with both Russia and the US could help achieve the sanctions policy objective.
This uncertain landscape is forcing business leaders to make a host of strategic decisions to navigate potential risks, such as adjusting supply chain strategies, divesting high-risk businesses, and enhancing regulatory compliance and risk management frameworks
Navigating an increasingly complex geopolitical landscape
Ukraine is only part of the picture. Across the world, trade sanctions are becoming a major focus for supervisory authorities. Rising geopolitical tensions have prompted governments to strengthen their regulatory frameworks, provide clearer guidance, and collaborate with international counterparts to enhance information-sharing and coordination.
In addition, supervisors have enhanced their scrutiny and enforcement efforts in relation to trade sanctions to ensure compliance with new measures, as we explore in our paper 'Navigating The Geopolitical Storm.' The United Kingdom, for example, recently created two bodies to supervise financial sanctions and trade sanctions: the Office of Financial Sanctions Implementation (OFSI) and the Office of Trade Sanctions Implementation (OTSI).
What boards and senior managers can do to navigate sanctions
Boards and management teams can take five concrete steps to help seize new opportunities and sidestep potential problems in a world of rising geopolitical risk and increasingly complex sanctions structures:
1. Define who “owns” geopolitical risk internally
Determining central responsibility for the management of geopolitical risk is essential for ensuring adequate risk identification, assessment, and management. Since geopolitical risk cuts across multiple functions and businesses, boards have a role to play in ensuring there is clear ownership and accountability as well as connectivity, especially in siloed structures.
2. Thoroughly assess the impact of geopolitical risks
To enhance their firm’s resilience to geopolitical risk, boards and senior management should thoroughly understand — and regularly assess — these risks and their potential impact on operations, supply chains, and markets. Boards should engage with experts in geopolitics and leverage new technologies for better risk management to gain insights into emerging trends, regional dynamics, and scenarios that could affect their firm.
3. Be proactive, taking immediate action when needed
Once risks are understood and assessed, boards and senior management must take proactive measures to manage these risks appropriately. This involves developing robust risk management strategies and contingency plans that address potential geopolitical challenges. Boards should work closely with management to identify and implement the required measures, whether that be diversifying supply chains, reducing dependencies on high-risk regions, or establishing alternative sourcing options.
4. Develop long-term playbooks
Scenario planning is one way to ensure geopolitical risks are appropriately managed over a long time horizon. Organizations might consider the potential impact of changes to US foreign policy or reliance on particular jurisdictions in sourcing rare-earth minerals and precious metals. By engaging in scenario planning, boards and senior leadership can prepare for various contingencies and develop appropriate response strategies.
5. Continually reassess geopolitical risks
Since geopolitical risks are dynamic and can evolve rapidly, boards and senior managers must establish a system to continually monitor and assess risk. This might involve keeping a finger on the pulse of geopolitical developments, policy changes, and emerging trends through regular intelligence gathering and analysis. By maintaining a vigilant and proactive approach to risk monitoring, boards can identify emerging threats, adapt their strategies accordingly, and take timely mitigation actions.
For example, reviewing financial crime controls on a continual basis is vital to effectively managing sanctions-related risks and aligning them with the organization's risk appetite. This includes assessing the adequacy of existing controls, policies, and procedures to ensure compliance with sanctions regulations. Boards and senior leadership should also consider implementing robust monitoring and reporting mechanisms to detect and address risks on an ongoing basis.
Taking early action and concrete steps in geopolitical risk management
It is likely that boards and senior management will need to make strategic decisions to navigate potentially choppy geopolitical waters in the coming years. They might need to evaluate and adjust their global supply chain strategies, divest higher-risk businesses, or reassess their market expansion plans due to potential risks associated with entering or operating in certain regions.
Given the rapidly changing sanctions landscape, firms may also need to enhance their regulatory compliance and risk management frameworks to ensure adherence to evolving trade regulations and sanctions regimes. By leveraging tools like Marsh McLennan’s Sentrisk, an AI-powered platform that combines top-tier data capabilities with deep risk expertise, companies can take concrete steps to properly identify, proactively manage, and continually monitor risks. This will help boards and senior leadership ensure effective risk management is in place to navigate a time of unusual uncertainty.