In response to Russia’s invasion of Ukraine, governments worldwide have introduced a massive package of sanctions designed to curtail Russian aggression and bring the conflict to an end.
The International Compliance Association (ICA) is a professional membership and awarding body. ICA is the leading global provider of professional, certificated qualifications in anti-money laundering; governance, risk, and compliance; and financial crime prevention. ICA members are recognized globally for their commitment to best compliance practice and an enhanced professional reputation. To find out more, visit the ICA website.
The sudden, rapid imposition of sanctions has affected banks, financial institutions, and many other businesses, some of whom might be struggling to keep up the specific measures adopted by governments.
Below are answers to selected questions from attendees during a recent ICA webinar on Russia sanctions intended to help provide clarity on what firms can do to protect themselves from sanctions exposure.
Disclaimer: The following is not intended as legal advice. Your first point of reference should be your firm’s policies and procedures, as well as your relevant jurisdiction’s legislation and regulatory guidance.
Q. Only a few specific banks have been sanctioned in Russia. What is the risk factor regarding other banks that have not yet been sanctioned from the same country? Should we look at payments from unsanctioned banks with the same scrutiny?
A. Given the fluid situation, the direction of travel on Russia sanctions is not easy to ascertain. There are, however, steps that can be taken.
Firms should be constantly reviewing their sanctions risk exposure to Russian financial institutions and their owners and controllers. This is likely to affect a firm’s overall sanctions risk ratings and appetite.
Horizon scanning is also key, along with comparing key jurisdictions’ listings to obtain an idea of the differences between them. In doing so, you will be able to see where jurisdictions like the United Kingdom, United States, and European Union align—as well as where they don’t—which will give you an idea of how your firm can protect itself. Understanding the commercial and operational risks is also vital in this respect.
Should payment providers and banks adopt a risk-averse approach, this could cause problems facilitating payments to Russia, even where there are no active sanctions in force against an entity.
Q. What is the extraterritorial reach of the differing regimes?
A. There are now several jurisdictions with active unilateral sanctions regimes in force. The United States, United Kingdom, and European Union provide perhaps the best examples of extraterritorial reach. This is especially the case with the United States: The international reliance on the U.S. dollar and how they define a “U.S. person” provides the country with greater extraterritorial global enforcement options.
Any correspondent banking relationship that provides U.S. dollar clearing facilities will be extremely mindful of not breaching U.S. sanctions. This will also be true of euro-clearing EU institutions. This, in no small part, is why so many firms around the globe are taking a very risk averse approach to any exposure to Russia.
In addition, the U.S. “nexus” whereby the Office of Foreign Assets Control (OFAC) may exert jurisdiction is very wide and may also include the use of U.S. infrastructure. The United States can deploy secondary sanctions—particularly under the Countering America’s Adversaries Through Sanctions Act (CAATSA)—meaning firms with limited direct exposure to the United States need to be aware of the potential impact of U.S. sanctions.
Q. How are European countries coping with the current state of affairs?
A. Overall, the political response in Europe to Russia’s invasion of Ukraine has been one of unity, with almost every European country condemning Russian aggression to a greater or lesser degree. These countries’ application of sanctions on Russian entities has been similarly uniform.
Where sanctions measures do differ between jurisdictions, this is due to how exposed these jurisdictions are to Russian oil and gas or trading in Russian wheat, for example. Driven by divergences in geopolitical agendas and focus, these differences between jurisdictions clearly add complexity.
Yet, there is evidence of joined-up thinking when it comes to European sanctions measures.
Take Switzerland, a non-EU member, as an example. The Swiss response to Russian aggression has led to the roll out of comprehensive sanctions, including on Russian oligarchs and the Russian central bank, as well as the banning of any exports that “could contribute to Russia’s military and technological enhancement.”
In March, Switzerland also adopted EU measures on Russian banks’ access to the SWIFT payment network.
Switzerland’s actions reveal the importance of unilateral sanctions from individual countries and how they form part of a wider, multilateral, and largely aligned and coordinated response from their European neighbors.
Firms need to evaluate their global sanctions policy—i.e., the lists they screen across all jurisdictions/centers, if they are cross-jurisdictional—and any country-specific legal requirements where customers or businesses in that jurisdiction are screened.
Q. What is your opinion on the potential expansion of cryptocurrency transactions aimed at circumventing sanctions, with an additional threat of strengthening the connection between Russia and China through UnionPay, which is aimed at circumventing the Visa and Mastercard ban?
A. It stands to reason Russia will try to find solutions to the restrictions they now face, and the use of cryptocurrencies to facilitate the movement of funds is one area that many are identifying as a potential route.
Banks and other financial institutions should therefore be alert to possible circumvention and evasion red flags.
These include corporate vehicles, shell companies, and the use of third parties. It is well-known corporate vehicles have historically been used to obscure ownership as well as any countries involved and source of funds. Shell companies pose an obvious threat, given their ability to conduct international wire transfers in countries totally different from that of the company’s registration, while third parties offer a means of hiding the identity of sanctioned persons.
Accounts that are newly established and try to conduct business with sanctioned institutions are also worth observing carefully, as is any increase in the foundation of new companies in jurisdictions formerly associated with financial flows related to Russia. Unusual foreign exchange transactions, which may involve (indirectly) sanctioned Russian institutions, will also require scrutiny.
Finally, two key areas worth following closely: cryptocurrencies and assets, which may be exploited for sanctions circumvention without using the traditional banking system, and accounts with a sudden increase in transferred value. If these do not display a clear business rationale, then they should be flagged.
Q. Increased caution must be exercised on investments, but what are the most effective means of mitigating the risks involved to avoid a sanctions breach?
A. It is vital you ensure you are up to date with the latest legislation, guidance, and lists from your relevant jurisdiction’s sanctions body.
The OFAC website provides sanctions lists, general guidance, sanctions programs, and country information, as well as a license application form.
In Europe, the EU’s sanctions map contains a useful, easy-to-use guide on its current sanctions legislation.
In addition, the European Commission’s restrictive measures portal offers a detailed overview of the sanctions in place on Russian entities.
The U.K.’s Office of Financial Sanctions Implementation (OFSI) has published the following:
- Russia sanctions legislation
- OFSI guidance
- OFSI list (available in various formats)
U.K. Finance is also an excellent source of UK-based sanctions guidance.
This article contains excerpts from the full story by the International Compliance Association. The ICA is a sister company to Compliance Week. Both organizations are under the umbrella of Wilmington plc.
No comments yet