The document discusses the concept of "black swan" events as proposed by Nassim Nicholas Taleb - highly improbable events that are unpredictable but have major consequences. It analyzes Brexit and the election of Donald Trump as examples of black swans that occurred in 2016. It then examines some of the potential compliance challenges that may arise from these events, such as changes to financial regulations in the US and EU and the potential impacts on sanctions. It concludes by noting that compliance professionals must prepare for future unpredictable black swan events by considering trends and developing new tools and approaches to respond adequately.

1. Black swans
fading to grey
and white
ISSUE 27
YOUR MAGAZINE FROM THE INTERNATIONAL COMPLIANCE ASSOCIATION
inCOMPLIANCE
®
Cultural
exchange
Cronyism and
corruption
The virtuous
circle
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2. inCOMPLIANCE®
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THOUGHT LEADER
Black swans fading
to grey and white
Vladimir Berezansky considers the game changing events of 2016,
their impact for the coming year, and potential further
black swans on the horizon

3. inCOMPLIANCE®
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THOUGHT LEADER
I
n late 2007, Nassim Nicholas Taleb, a relatively unknown
Lebanese-American theoretical statistician, published
“The Black Swan.” Its release was as if perfectly timed to
provide a tangible, accessible context for the financial crisis
that quickly engulfed the world’s major banks and capital
markets. Typical of many eureka moments in human history,
Professor Taleb’s insight was blindingly simple.
According to Taleb’s paradigm, a “black swan” is a highly
improbable event with three principal characteristics: (1) it is
unpredictable; (2) it is an unequivocal game changer; and (3)
following its occurrence, explanations are essentially reverse-
engineered to provide artificial intellectual comfort (i.e.
reasons why the black swan should have been anticipated
but wasn’t).
2016: two “real” black swans
Leaping ahead almost exactly a decade, we have recently
been confronted with two jarring game-changers: Brexit
and the election of Donald Trump. By way of confirming
that each of these events was indeed a black swan, one
need only survey the millions of words generated in earnest
on the world’s television and radio broadcasts or in print,
all intended to explain why we should have foreseen these
eventualities long before their arrival. QED.
In one of his recent weekly broadcasts, CNN’s Fareed
Zakaria reminded his viewers of a tongue-in-cheek adage
about how journalists are taught to keep count of recurring
(or highly similar) current events, namely: “One, two... trend.”
This is actually a significant corollary to Prof. Taleb’s doctrine
of the black swan. In the media’s haste to identify subsequent
world events as confirmation of the brave new world of the
Brexit-Trump black swans, the results of the subsequent – but
by no means consequent – Italian referendum were press-
ganged into service.
If anything, the Italian constitutional referendum held on
4 December 2016 only reinforced the distinct essence of
the two genuine black swans of 2016 (i.e. as unpredictable
game changers). The Italian plebiscite was highly specific and
domestic, sharing few, if any, of the dynamics of populist rage
that propelled Brexit and Donald Trump’s election.
Trump: deregulation and diverging
standards?
President-elect Trump has already made known his
position that the US banking sector is over-regulated.
Specifically, he has identified Dodd-Frank as an object of
his disdain. For our purposes, it might be most useful to
focus on Title VI, the Volcker Rule, and Title VII, containing
provisions for subjecting OTC derivatives to mandatory
clearing with regulated trading platforms. Other potential
aspects of Dodd-Frank that might be rolled back include:
the requirement that banks establish Board-level risk
committees; fee disclosure requirements for retail cross-
border transactions (Remittance Regulation 1073); and the
prohibition of US-based sales or traders from dealing with
counterparties that have not acceded to the rules of the
International Swaps and Derivatives Association (ISDA).
Compliance professionals will need to monitor media
coverage of specific Executive branch initiatives to weaken
or repeal these or perhaps other aspects of the Dodd-Frank
regulatory infrastructure. Additionally, US banks and non-
US banks with American subsidiaries or branches might
also seek to maintain open channels of communication with
relevant US Government regulatory authorities and self-
regulatory organisations (SROs). As soon as a short list of
likely near-term targets for reduced or rescinded regulatory
enforcement becomes known, it will be necessary to review
in-house protocols and procedures in order to identify a
prioritised action plan for making responsive adjustments.
You should have no doubt that Front Office colleagues will
be quick off the mark in demanding that corresponding
reductions to Compliance’s internal controls be implemented.
Finally, compliance professionals working at multinational
banks and other cross-border financial institutions should
give thought to preparing for scenarios wherein one set of
regulatory standards (such as Dodd-Frank) is stepped back,
while a functionally equivalent regulatory regime (such as the
European Market Infrastructure Regulation on derivatives,
central counterparties and trade repositories; EMIR) is
maintained or, perhaps, even ratcheted up.
Sanctions
Next, news media have consistently reported that Mr Trump
and several of his advisors are keen to turn relations with
Russia back onto a more productive track. To these ends, it
is possible that, as President, Mr Trump might rescind the
Executive Orders that constitute the US legal authorisation
for the Russian sanctions regime. A proactive compliance
contingency plan for 2017 should include detailed
procedural guidance for phasing out and/or rapidly lifting
the relevant US sectoral sanctions (keeping in mind that
there are other, unrelated US sanctions restrictions also in
place, such as the “Magnitsky List”), but anticipating an
indefinite period during which such US sanctions may be
summarily removed (by a deft stroke of Mr Trump’s pen)
while EU sanctions, which are based on properly-enacted
EU legislation, remain at least temporarily in force.
At the time of writing, it is not yet clear whether the US
Congress might attempt to pass “veto-proof” legislation
imposing additional sanctions on Russia in response
Compliance professionals
working at multinational
banks and other cross-border
financial institutions should
give thought to preparing
for scenarios wherein one
set of regulatory standards
is stepped back, while
a functionally equivalent
regulatory regime is maintained
or, perhaps, even
ratcheted up

4. inCOMPLIANCE®
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THOUGHT LEADER
to recent allegations that Russian government-backed
hackers interfered with the US presidential electoral process.
The outlook for potentially even drastic changes to the US
sanctions regime as it applies to Russia therefore could
change on a daily basis leading up to and immediately
following Mr Trump’s inauguration. Sanctions compliance
professionals should closely monitor changes to the Office
of Foreign Assets Control (OFAC) Sanctions Lists and other
official US Government information sources.
Further to sanctions lists, forward-looking compliance
professionals would do well to give thought to how specific
sanctions regimes might be stepped down gradually – and
possibly in their entirety, depending on relevant geopolitical
developments – in the cases of (at least) the following
countries: Cuba, Myanmar (Burma), Iran and Colombia. As
a recent example of how national political agendas often
drive sanctions regimes, many were caught off guard by how
quickly OFAC acted to remove certain specific US currency
controls from the Cuba sanctions regime in anticipation of
President Obama’s historic visit to Havana in March 2016.
“Business friendly” compliance professionals will have
contingency plans already in place in anticipation of similarly
rapid changes to other country and/or sector-specific
sanctions regimes.
The Brexit swan
With regard to the other “real” black swan of 2016, it
appears – for now, at least – that compliance-relevant
events will be unfolding at a relatively more moderate pace.
Nonetheless, compliance professionals should continue to
monitor news reporting on UK-EU negotiations – once they
commence in earnest – on key issues such as passporting
and the continued applicability of EU banking regulations to
UK banks.
Another important, although perhaps “softer” category of
current developments that merits monitoring is the extent to
which global and/or EMEA headquarters for multi-national
banks begin to migrate from London to other EU cities. There
are already media reports that Dublin, Paris, Amsterdam
and Frankfurt – and perhaps other contenders – have
prepared and launched publicity and bank-specific marketing
campaigns aimed at attracting at least the EU silos if not the
entire global headquarters of major multinational banks away
from London.
Future swans
These measures could be considered logical and even
obvious preparations that compliance professionals should
be considering in anticipation of the grey and white swans
that are likely to be seen in the coming months, given the
two black swans of 2016. As indicated earlier, however, the
far more daunting task facing compliance professionals is to
prepare, to the extent possible, for the next truly black swans
that will occur sooner or later. Meeting this challenge will
require creativity and ingenuity.
Looking forward into 2017, what is the significance for
compliance of these two clear-cut black swan events? I
submit that they constitute a wake-up call that challenges
us to review our basic principles and to rethink and re-
engineer our approach to the array of risks that we are
charged with mitigating.
Berezansky: Black swans provide a wake-up call
The daunting task facing
compliance professionals
is to prepare, to the extent
possible, for the next truly
black swans that will occur
sooner or later. Meeting
this challenge will require
creativity and ingenuity

5. inCOMPLIANCE®
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Without undue dramatisation, let’s be clear about what
we are facing: As we bid farewell to 2016, we now know
that black swans are not just a useful statistical tool for
placing a specific variety of abnormal historical events
into a broader perspective. Black swans occur and will
continue to occur; we must therefore devise the intellectual
and practical tools necessary to react adequately to such
inevitable future occurrences.
To adjust our focus properly it is necessary to step
back and identify trends that are likely to raise significant
future implications for the compliance function. Which
major developments and significant tendencies are likely
to raise complex issues that will most likely challenge our
fundamental assumptions and working premises?
One such development is the gradual realisation in the
banking and financial services sectors that the practice of
occupying substantial office premises – whether it be a
far-reaching network of small branch offices or an imposing
urban skyscraper – has become obsolete. The obvious
corollary to this tendency is the drastic downsizing of
banking staffs, a process that is already well underway. The
overwhelming trend is clearly toward remote, online, and
virtual banking in all aspects and respects.
A related development is the question of how proper
onboarding “know your customer” (KYC) checks could be
performed if the prospective client completes its application
by speaking to a chatbot. In this new paradigm, what kind
of documentation should and must be compiled for the
completion of adequate and reliable due diligence? Will a bank
or other licensed financial institution need to maintain digital
KYC files on its premises? Moreover, in this radically disrupted
context, what might constitute “premises”?
Is it sufficient for the Compliance Function to have secured
the services of a reliable (licensed?) third-party vendor of
outsourced KYC processing? In this scenario, which entity
bears legal (including potentially criminal) liability before the
regulator: the bank, or the vendor to which it has outsourced
the KYC on-boarding function? If the latter, then what will
compliance’s indispensable role be?
Can a bank or its properly accredited third-party vendor
maintain KYC files in the Cloud? Would regulators be
comfortable with this type of architecture? Would this
configuration pass muster with the restrictions imposed by
personal data privacy legislation in many countries?
Future challenges
This has been just a brief overview of the questions that
compliance professionals need to be considering now to
ensure the Compliance Function’s adaptability and viability
in light of inevitable changes to the broader structural
banking paradigm. Peering at the horizon line’s furthest crest,
financial regulatory compliance professionals will need to
adapt quickly to the following – and perhaps other, as yet
unforeseen – game changers:
• Cyber security – This is no longer the exclusive preserve of
IT and/or Security. Compliance needs to become intensely
involved in establishing, maintaining and managing metrics
for cyber security protocols, procedures, and interface
with relevant governmental authorities and SROs. In early
December 2016, the Federal Deposit Insurance Corporation
(FDIC), Office of Comptroller of the Currency (OCC), and
the Fed announced the opening of a notice and comment
period for proposed cyber security requirements as part
of their collective efforts to help protect financial markets
and customers from cyber attacks. Later the same month,
the New York (state-level) financial regulator proposed
revisions to the nation’s first prototype for cyber security
regulations for banks and insurers, including heretofore
unprecedented requirements for financial firms to protect
their networks and customer data from hackers.
• Crypto-currencies – This is no longer a hybrid, countercultural,
elitist hobby, but rather a viable and readily accessible
alternative to sovereign (“fiat”) currencies. In early December
2016, Bloomberg reported: “In Denmark, the [Central Bank
is] now looking into producing a virtual currency, which they
predict will make crime harder and oversight easier. The Danes
aren’t alone. Britain and Sweden are blazing a trail in Europe.
Singapore and Canada have already tested blockchain-based
currency systems for internet payments.”
• FinTech – The competition to establish global leadership
in this developmental vector has become quite aggressive.
The UK, Switzerland and Singapore have implemented
regulatory holidays for government-supported incubators;
and Singapore is providing government grant funds to
attract fintech expertise to their national incubator.
Finally, if readers were perhaps expecting to see the
Panama Papers treated – whether or not in the guise of a
black swan – in such a year-end summary of recent (past)
and (future) anticipated compliance highlights, they should
take note that this will be covered in my next article for
inCOMPLIANCE (which will be published in March 2017).
Peering ahead into 2017, it appears that there are, if anything,
even more complex compliance challenges awaiting us than
those encountered in 2016.
Vladimir Berezansky was one of the first foreign
professionals to bring Western (US, UK, EU) regulatory
compliance leadership to the Russian/CIS/CEE financial
services market. He has more than 15 years of work
experience in Russia/CIS and Eastern Europe, as well as
Cyprus, Switzerland and in London’s financial markets.
Among his specialisations, Vladimir is a recognised expert
in structured offshore Russian wealth, including how and
why these specific strata of global offshore wealth were
created, their legitimate uses, and indicia of suspicious and/
or potentially illegal uses.
Black swans occur and will
continue to occur; we must
therefore devise the
intellectual and practical
tools necessary to react
adequately to such inevitable
future occurrences
THOUGHT LEADER