The Russian invasion of Ukraine set off a cascade of increasingly severe new sanctions against Russia and its financial sector. As the world watches the unfolding events, it is perhaps more important than ever that financial institutions stay abreast of the rapidly evolving sanctions landscape to ensure compliance and avoid violations.
The Importance of Sanctions Compliance for Financial Institutions
Uniquely positioned as the main entry point of funds into the financial system, financial institutions bear the brunt of sanctions enforcement. Furthermore, sanctions involve a broad range of measures that can complicate risk management. Additionally, the costs of an inadequate sanctions compliance program are high, ranging from regulatory fines and penalties to reputational damage and loss of future business. As a result, the emerging sanctions on Russia have broad implications for financial crime compliance departments. Therefore, it is critical that FIs have a robust sanctions compliance program in place and take a proactive approach to sanctions compliance, including real-time screening, ongoing monitoring, and the ability to respond swiftly.
What are the Financial Sanctions Imposed on Russia?
The three main regimes implementing new sanctions against Russia thus far are the United States, the European Union, and the United Kingdom. A number of other countries, including Canada, the historically neutral Switzerland, and several Asian nations, among others, have also either issued sanctions or pledged to join these measures. The sanctions largely target the infrastructure of Russia’s financial system, a sector heavily dominated by state-owned actors. These measures are meant to bar Russia from access to major capital markets, with the goal of deterring further Russian assault on Ukraine.
In particular, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) has imposed expansive economic sanctions on Russian financial institutions, including Russia’s largest banks and multiple financial institution subsidiaries located around the world. These sanctions range from full blocking and freezing of assets, as in the case of VTB Bank Public Joint Stock Company, to sanctions on correspondent and payable-through accounts meant to impact the ability to process U.S. dollar payments, as in the case of Sberbank. OFAC’s sanctions also target Russian-owned entities and certain individuals. Targeted individuals primarily consist of Russian elites and their family members, including Putin himself, as well as executives at Russian-owned banks and others with connections to Putin and the Kremlin. (A few targeted individuals have been previously designated as SDNs by OFAC and have been re-designated). These sanctions generally prohibit any direct or indirect dealing with the sanctioned banks (unless authorized pursuant to a wind-down or other general license) as well as generally prohibit all business with the sanctioned parties and their owned entities. Additional new prohibitions related to new debt and equity of major Russian state-owned enterprises and large privately-owned financial institutions have also been imposed.
In perhaps the most severe new sanction against Russia, the EU, UK, U.S., and other allies have agreed to exclude select Russian banks from SWIFT, the global payment system used by over 11,000 FIs in more than 200 countries to facilitate bank transactions worldwide.
By and large, sanctions issued by the EU, UK, and other partners have been in line with those of the U.S. As the situation remains fluid, additional and more stringent measures are expected against Russia.
How Can Financial Institutions Ensure Sanctions Compliance?
The diverse and increasing array of sanctions measures can make sanctions compliance seem challenging and complicated. The “Framework for OFAC Compliance Commitments,” issued by the U.S. Treasury in May 2019, provides a general starting point for financial institutions by setting out five essential components of compliance: 1) management commitment; 2) risk assessment; 3) internal controls; 4) testing and auditing; and 5) training.
It is recommended that financial institutions design and implement a risk-based sanctions compliance program (SCP) tailored to their institution based on these five elements. Financial institutions which already have an SCP in place may need to revisit some, or all, of these components to ensure compliance with the new sanctions against Russia. This may require increasing the frequency of audits and/or reviews to ensure processes and procedures are effective and functioning as expected.
It would also benefit financial institutions to review and update related policies and procedures that may impact, or can be coordinated with, sanctions compliance, such as various AML processes and practices (e.g., KYC, due diligence, transaction monitoring, etc.).
For example, FIs should review existing beneficial ownership due diligence processes with an eye toward potential beneficial ownership deficiencies, blind spots, and loopholes. Historically, Russia has effectively evaded sanctions using shell companies, gatekeepers, and proxies to hide or disguise sanctions targets and Russian connections. Therefore, this is an area where additional scrutiny should be applied.
Institutions should also consider aligning third-party due diligence procedures with sanctions screening (including screening all relevant watch lists and PEP lists). This would also help FIs to check more broadly for potential exposure to sanctions targets, including any secondary or indirect exposure from third parties, vendors, business partners, consultants, etc.
In addition to screening for sanctions connections to Russia, including designated entities and individuals, FIs may consider heightening their risk-based approach by also screening for risky non-designated banks, entities, and individuals. Furthermore, since Russia’s large financial services sector is heavily dominated by state-owned actors, PEP screening should be given extra attention.
Financial institutions (especially FIs doing business abroad and subject to the laws and regulations in multiple jurisdictions) will need to ensure that they are screening all the necessary sanctions lists, as most jurisdictions (including the UK, Canada, Australia, and France, to name a few) maintain their own lists. Screening OFAC’s SDN list alone may not be sufficient in many cases.
Particularly those FI’s who have been working with Russia and/or its top trading partners, such as China, should take additional precautions. For example, this may include things such as checking whether wealthy customers or companies have recently transferred funds out of the region or evaluating recent changes in entity ownership made in anticipation of the new sanctions against Russia. Depending on the FI’s risk exposure, a comprehensive “look back” may be necessary.
FIs must work to ensure that relevant staff receive guidance and understand the latest sanctions measures so that they are able to manage increases in “false positives,” and that appropriate escalation procedures are in place, including where to direct inquiries about potential sanctions matches as well as mechanisms for the internal reporting of violations. This also includes understanding protocols for blocking transactions and freezing funds, as well as reporting to relevant agencies, such as OFAC, which may have strict deadlines.
Changes in policies, processes, and procedures will need to be clearly communicated to impacted staff in a timely manner. Punctual and ongoing training will need to be conducted to ensure that all staff receive the latest information and remain up to date. Members of the Board and C-suite will also need to be kept apprised of major sanctions developments impacting the institution and the FI’s corresponding approach. This will also help garner their support of the compliance function.
Finally, compliance departments should be aware of the fluidity of the situation and be prepared to respond quickly to changes and additions in sanctions requirements. This includes making any necessary arrangements for staff to receive timely information and access systems when working remotely.
In Conclusion: What New Sanctions Against Russia Means for FIs
Sanctions on Russia are expected to have a substantial impact on Russia’s economy and its access to the global financial sector.
Although many U.S. banks doing business globally have significantly reduced their exposure to Russia and beefed up their compliance programs since Russia’s annexation of Crimea in 2014, it is still imperative for FIs to revisit existing policies, procedures, and systems, and to take a proactive approach to sanctions compliance. Additional sanctions are inevitable and FIs need to be prepared. The potential of conflicting sanctions regimes would make it more complex and expensive for FIs to implement appropriate controls if done too late.
Moreover, there is the potential that secondary sanctions will be issued. Secondary sanctions target third parties that do business with the underlying sanctioned entities. Those types of sanctions are more difficult for compliance departments because of the complexity of identifying indirect business connections.
How Can Alessa Help with Sanctions Compliance?
Despite these times of uncertainty, the evolving nature of sanctions lists, and the expectation of additional new sanctions against Russia, compliance staff at financial institutions don’t have to be overwhelmed. A comprehensive sanctions screening and transaction monitoring solution would significantly ease the burden on overworked compliance teams and help ensure compliance.
An effective and reliable sanctions screening system can help compliance staff better understand who their clients and business partners are, as well as manage tricky relationships among PEPs, including difficult-to-identify relatives and close associates, and assist with reporting duties such as Suspicious Activity Reports (SARs).
Alessa offers real-time sanctions screening solutions powered by advanced name-matching capabilities. Using high-quality data and the most up-to-date watch lists, Alessa’s sanctions screening software can significantly reduce the time spent reviewing AML false positives. And because Alessa provides access to a variety of watch lists from numerous jurisdictions, compliance teams can rest assured knowing that all relevant lists are being screened.
Contact us to learn more about how Alessa can help you reduce the risk associated with the new sanctions against Russia and more.