The author is a global leader on sanctions, compliance and risk at ACAMS
Two months have passed since the beginning of the Russian invasion of Ukraine, and the fog of war continues to overshadow the country’s future. Such uncertainty is now emerging in global markets, where a flood of economic and trade restrictions aimed at punishing Vladimir Putin threatens to overwhelm financial institutions’ ability to assess where their regulatory risks lie. If we want to ensure that sanctions remain effective, banks and other companies will need significant international assistance soon.
For governments, the scale of recent freezes and asset confiscations is unprecedented, from yachts to Russian residential and commercial properties to the freezing of tens of billions of dollars in Russian funds.
But the picture drawn by such headline measures remains extremely incomplete from the point of view of financial institutions in charge of sanctions. This is because, simply put, nothing like this has happened before. No other G20 member state has been subjected to such a wide range of economic and trade restrictions by so many economies, much less in such a short period of time. Over the past 30 years, Russia’s blacklisted oligarchs and government officials have quietly become ubiquitous, integrating their interests abroad through decades of sophisticated financial investment, non-transparent corporate ownership, anonymous property purchases and other means.
Sanctions are further complicated by Russia’s role in international trade. The country is not only a global energy supplier, but also a major exporter of wheat, semi-finished iron, crude nickel and nitrogen fertilizers – a business that inherently involves compliance risks in the maritime and aviation sectors. All this adds weight to the notion that sanctions against Russia are particularly cumbersome and will take time to resolve. Unfortunately, the reality is even more challenging.
Targeted sanctions oblige banks and other companies to review within the enterprise their relationships with customers, held assets, transactions and counterparties related to the payments they process – all of which must be checked against the grid of corporate structures, investments and partners, associated with any designer with a high net worth. But restrictions on Moscow are much more diverse than usual and require institutions to restrict correspondent banking services, impose credit restrictions, enforce export controls and identify individuals who own or otherwise control legal entities involved in related activity. Complicating matters, jurisdictions have not always agreed on which entity is targeted or how.
The countermeasures against the Kremlin came so quickly that, as Nicholas Turner of Steptoe & Johnson recently said, “the law plays a catch-up policy.” In some cases, he noted, governments have begun to adopt new powers and capacity for sanctions only after announcing their intention to impose restrictions. This has even happened in the United States, where President Joe Biden has signed an executive order approving sanctions against Russian investment, but the Treasury has not yet announced which investment instruments will be banned and what the restrictions will be.
Many other questions of probably equal importance – how Russia will seek to avoid sanctions, how companies are expected to mitigate the risks associated with them and what guidelines lie ahead on new UK and EU rules restricting withdrawals from Russian banks – also remain. unauthorized.
None of them prevented civil servants from taking an aggressive stance on law enforcement. Janet Yellen, the US Treasury Secretary, and Jake Sullivan, the White House’s national security adviser, reaffirmed the Biden administration’s readiness to take countermeasures against nations or other parties that are helping Moscow circumvent sanctions. The US Department of Justice and the US Treasury Department have launched a multilateral working group of Russian elites, proxies and oligarchs (REPO) targeting blacklisted Russians and their assets.
The extent to which banks will be held accountable for failing to suspend prohibited payments or freeze earmarked funds remains uncertain. What is certain is that many will fail without further cooperation. This means that law enforcement and anti-money laundering specialists will need to work internally and with external partners to prepare for the upcoming opportunities. Governments must be directly involved with the private sector.
If we want to ensure that sanctions support the Ukrainian people by making the cost of war unacceptably high for Russia, we will have to do so in a coordinated way that recognizes the hard work in the financial sector. The reason here is fair, but the foreign policy instrument of sanctions – the fiscal tool instead of the real one – will only be useful if the ship carrying it is not lost at sea.
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