Bankers and other financial services professionals across the world woke Monday to a new, unprecedented era of compliance: an international, potentially devastating embargo against Russia after the Kremlin intensified its military campaign in Ukraine over the weekend.
Within hours of each other, American, European, British, Canadian and Japanese officials unveiled details of their respective bans on payments to and from Russia’s central bank, sovereign wealth fund and Finance Ministry, which they had previewed Sunday in tandem with each other.
The moves come four days after the U.S. Treasury Department implemented a prohibition on holding U.S. correspondent or payable-through accounts for Russia’s largest lender, Sberbank, and announced the designation of VTB, which ranks second among Russian financial institutions in terms of assets.
Monday’s U.S. sanctions against the Finance Ministry, National Wealth Fund and Central Bank of Russia largely mirror Thursday’s against Sberbank in that they do not technically block U.S.-based assets, but rather bar U.S. banks from handling them, said Joshua Kirschenbaum, a former official with Treasury’s Office of Foreign Assets Control, or OFAC.
The goal is to impede the Kremlin’s access to the foreign reserves it holds in the U.S. or at the overseas branches of U.S. lenders, Kirschenbaum, now a senior fellow at the German Marshall Fund’s Alliance for Securing Democracy, told ACAMS moneylaundering.com.
President Joe Biden already limited the three institutions’ ability to raise and move funds on international equity and debt markets in an earlier round of restrictions announced Feb. 22. U.S officials announced Monday that they would similarly exempt payments for Russian oil and gas exports involving the Central Bank of Russia from prohibitions.
“They are trying to get as close as possible to a full financial embargo on Russia while shielding energy imports,” Kirschenbaum said. “It’s about as aggressive as you can get if you don’t touch energy.”
OFAC also blacklisted VEB, a Russian development bank, and Promsvyazbank, or PSB, a state-owned lender tied to the defense industry, on Feb. 24, and added President Vladimir Putin and Foreign Minister Sergei Lavrov to the U.S. list of specially designated nationals and blocked persons, or SDNs.
Compliance professionals told moneylaundering.com earlier this month that they were monitoring for signs of military action in Ukraine and potentially far-reaching sanctions, but otherwise conducting business as usual and not actively planning to further decouple themselves from Russia as they did eight years ago, when the Kremlin first seized Crimea.
But the situation changed in the days before Russian troops crossed into new areas of Ukraine on Feb. 24, as the prospect of complex, but ultimately targeted sanctions against certain Russian industries—similar to those adopted in 2014—gave way to a much more robust, comprehensive response, a compliance officer for the U.S. branch of a global bank said.
“We were able to make a proposal to the branch management to cease the processing of all Russian payments last week in advance of the sanctions,” the compliance officer told moneylaundering.com on Monday. “Fortunately, the more expansive sanctions actually help us in implementation … they take out a lot of analysis.”
In addition to targeting Russia’s National Wealth Fund with restrictions, OFAC also blacklisted the Russian Direct Investment Fund on Monday alongside two associated entities and chief executive Kirill Aleksandrovich Dmitriev.
U.S., U.K. and EU officials disclosed plans over the weekend to task a new transatlantic agency with locating and seizing the Western assets of blacklisted Russian individuals and companies.
They also pledged to revoke the access of “selected” Russian banks to the global payment messaging system run by the Belgium-based Society for Worldwide Interbank Financial Telecommunication, or SWIFT, but had yet to release the names of the targeted lenders at the time of writing.
Even as companies in Asia and elsewhere reassess their exposure and take steps to safeguard their people and operations in Ukraine and Russia, the breadth, scale and speed of sanctions that G-7 nations have imposed and intensified thus far make their full impact difficult to assess, said Nick Turner, an attorney at Steptoe & Johnson in Hong Kong.
“Banks have come a long way since the Crimea sanctions in 2014,” Turner wrote in an email. “Compliance teams are bigger and more skilled, and the technology is better. Still, these sanctions are unprecedented.”
Planned SWIFT-related sanctions will almost certainly compound the overall challenge compliance officers now face.
“Depriving Russian financial institutions of access to SWIFT will make their lives more difficult, but they will not stop doing business, they will just try to circumvent this obstacle by using, for example, a bank located in a third country as a go-between,” Martijn Feldbrugge, director of the BSCN consultancy in Amsterdam, told moneylaundering.com.
Western banks would meanwhile face “a real headache” because they often use the platform to screen and trace transactional information for sanctions-compliance purposes, said Feldbrugge.
“They would now have to investigate further to get similar information about transactions not going through SWIFT,” he said.
British officials pledged Monday to bar transactions “involving” the Central Bank of Russia, National Wealth Fund and Finance Ministry to prevent Moscow from using its hundreds of billions of euros in foreign reserves to weather sanctions and support the rouble, which had dropped more than 25 percent in value against the U.S. dollar by the time of writing.
“The U.K. government intends to make further related designations this week, working alongside our international partners,” officials said in a statement, adding that Britain will also blacklist Belarusian individuals and organizations that have supported the invasion of Ukraine.
U.K. officials on Monday also blacklisted three additional Russian banks—VEB, Bank Otkritie and PJSC Sovocombank—after designating around a dozen lenders and some of their most senior employees last week, and said that a full asset freeze on Russian lenders would come into force within days.
On Friday, the U.K. Office of Financial Sanctions Implementation issued only its third general license since beginning operations in 2016, giving U.K. financial institutions until March 27 to wind down transactions involving VTB, Russia’s second-largest lender by market share, after Britain and the U.S. blacklisted the lender Thursday.
That would give U.K. financial institutions less than one month to identify the full extent of their exposure, negotiate the suspension of contracts and sell their positions.
U.K. officials on Monday also ordered Britain’s ports to ban any vessels sailing under a Russian flag and advised U.K citizens against traveling to Russia. The government is expected to introduce legislation that would limit the amount Russian nationals can hold in U.K. bank or payment accounts to £50,000.
“The legislation may have to be watered down and may not end up reflecting the description given last week for all sort of reasons, but the damage has been done,” said Anna Bradshaw, a partner with Peters & Peters in London. “Banks were already de-risking [Russian clients] left, right and center, but that was the nail in the coffin—de-risking will have become the new normal in the intervening period.”
Britain followed the U.S. and EU in designating Russian President Vladimir Putin and the country’s foreign minister, Sergei Lavrov, on Friday.
Brussels and Bern
In concert with London and Washington, D.C., the EU on Friday banned Russian residents and nationals from depositing more than €100,000, buying euro-denominated securities or holding accounts with the bloc’s “central securities depositories.”
European officials pledged Saturday to “limit the sale of citizenship—so-called ‘golden passports’—that let wealthy Russians connected to the Russian government become citizens of our countries and gain access to our financial systems.”
European officials had earlier disclosed plans to blacklist all 351 Russian lawmakers who voted in favor of recognizing the independence of the Luhansk and Donetsk regions from Ukraine, as well as target 27 “high profile individuals and entities” with asset freezes.
On Monday, the EU officially followed through by blacklisting one Russian company and 26 individuals, mainly oligarchs active in the oil, banking and finance sectors, and announced the extension of sanctions to Belarus after President Aleksandr Lukashenko let the Kremlin use his country as a staging point for the invasion.
The list includes Igor Sechin, head of Russian state oil company Rosneft, Nikolay Tokarev of Transneft, oligarchs Alisher Usmanov, Petr and Alexander Ponomarenko, Alfa Bank founder Mikhail Fridman and Promsvyazbank chairman Petr Fradkov, as well as journalists, ministers, high-ranking soldiers and the leader of Putin’s political party, United Russia.
“Compliance officers will have to anticipate how Russian entities can circumvent sanctions and be vigilant,” said Feldbrugge, the director of BSCN in Amsterdam. “For example, if a Russian customer used to buy a certain type of product on a regular basis and suddenly stops, but a new entity starts buying exactly the same thing, questions must be asked.”
Caught between its long-cherished policy of neutrality and the need to follow EU standards to retain its commercial interests in the bloc, Switzerland split the difference last week by prohibiting Swiss entities from establishing new business relations with people listed by the EU to prevent circumvention but ruled out the idea of freezing Russian funds directly.
But Swiss officials acceded to international pressure on Monday, announcing they would adopt all EU sanctions “with immediate effect,” including asset freezes.
“This is a major measure for Switzerland, it is a difficult step whose consequences were necessary to examine scrupulously,” Swiss President Ignacio Cassis told reporters in Bern.
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|U.S.: OFAC , U.S.: Department of Treasury , Russia
|February 28, 2022