This article originally appeared in the May-June 2022 issue of ABA Bank Compliance, by Chip Poncy and Leslie Devereaux Kuester. Reproduced with permission. Copyright 2022 The the American Bankers Association. For further use, please visit http://www.bna.com/copyright-permission-request/.
Since the start of the invasion of Ukraine by Russian forces on February 24, the United States (U.S.), United Kingdom (UK), and the European Union (EU) have led a global sanctions campaign against Russia that has been unprecedented in its speed, complexity, and global impact. This unfolding campaign will continue to present extraordinary implementation challenges for financial institutions (FIs) and the underlying global economy. Yet, through a series of pragmatic steps that leverage and integrate traditional anti-money laundering (AML) and broader counter-illicit financing efforts, FIs can effectively implement sanctions against Russia and establish a basis for a more transformative network solution.
The first part of this article summarizes the complexity of the unfolding sanctions campaign against Russia and the challenges this environment presents for FIs. The second part of this article outlines steps FIs should take to meet these challenges and to strengthen their financial crimes risk management capabilities. The article concludes with a more strategic perspective on how FIs’ efforts to implement sanctions against Russia can begin to demonstrate a more transformative, effective, and sustainable approach to combating illicit financing through a network solution.
PART I: A Highly Dynamic, Complex, and Challenging Sanctions Environment without Precedent
In less than one month, the U.S., EU, and UK have led a multilateral sanctions campaign against Russia that took several years to adopt in part against Syria, Iran, or North Korea. This campaign leverages decades of U.S. leadership and multilateral experience innovating various types of financial and economic measures to combat financial crime and collective security threats. As such, the evolving sanctions campaign against Russia is also more complex than any in history—drawing from twenty years of global post-9/11 efforts to develop and integrate policies related to sanctions, countering the financing of WMD proliferation and terrorist financing, and AML.
This complexity is immediately evident in summarizing actions taken during the first month of Russia’s war on Ukraine. The global coalition against Russia has issued, strengthened, and/or expanded the following types of sanctions programs, many of which were initially authorized or contemplated following Russia’s invasion and annexation of Crimea in 2014:
- Comprehensive territorial trade ban: The coalition’s renewed sanctions campaign against Russia began with a comprehensive trade ban against the breakaway Donetsk and Luhansk regions of Ukraine, after Russian President Vladimir Putin’s declaration of these regions as sovereign states. This trade ban effectively expands pre-existing territorial sanctions levied against Crimea following Russia’s annexation of Crimea in 2014.
- Targeted blocking sanctions against specific individuals and entities: Countries have dramatically expanded targeted sanctions against the Putin regime and those who support or benefit from it. This includes imposing full blocking or asset freezing measures on a growing list of Russian elites and their family members, including Vladimir Putin, Foreign Minister Sergei Lavrov, and the Russian oligarchy.
- Targeted blocking sanctions against designated Russian financial institutions: The U.S. and its allies have imposed full blocking sanctions against the Russian Direct Investment Fund (RDIF), a key Russian sovereign wealth fund, and several Russian banks, including VEB, Promsvyazbank, VTB Bank, Bank Otkritie, Sovcombank, and Novikombank, along with various subsidiaries of these banks.
- Targeted blocking sanctions against the Nord Stream 2 pipeline project: The U.S. added the project company Nord Stream 2 AG to the Specially Designated Nationals and Blocked Persons (SDN) list, immediately following Germany’s decision to halt certification of the Russia-Germany pipeline.
- Targeted debt and equity restrictions: Debt and equity restrictions against designated entities operating in Russia’s finance, energy, defense, and technology sectors have expanded and intensified, to include new U.S. debt and equity restrictions on 13 of the most critical Russian enterprises and entities.
- Complete financial prohibitions: The U.S. and its allies have prohibited transactions with the Central Bank of Russia; severed connections to the U.S. financial system for Russia’s largest financial institution, Sberbank, plus 25 of its subsidiaries; and prohibited new U.S. investments in Russia’s energy sector.
- Export controls, trade restrictions, and prohibitions: Restrictive export controls and trade prohibitions with Russia have substantially expanded, including new U.S. Department of Commerce export controls for U.S. technologies such as semiconductors, computers, lasers, telecom equipment, and other dual-use products used to sustain military and business capabilities. The U.S. has also banned the import of Russian oil, liquified natural gas, and coal; prohibited importation of other specified Russian goods; and banned exports of luxury goods and banknotes to Russia. Similar efforts to substantially restrict or prohibit trade with Russia are underway in other allied countries.
- Expansion of sanctions campaign to Belarus: The global coalition has expanded its sanctions campaign against Russia to include Belarus, as Belarus continues to support Russia’s invasion of Ukraine.
- Efforts to expand regulatory coverage to bring greater transparency to vulnerable sectors: A new Executive Order from the White House directs agencies in Washington to bring greater transparency and accountability in the virtual asset sector. This effort is driven in part to combat Russian sanction evasion through convertible virtual currencies. Jurisdictional authorities may similarly accelerate or intensify efforts to enhance the transparency of other sectors vulnerable to Russian sanctions evasion—including with respect to trust and company service providers, company formation and registration processes, real estate, and capital markets. These efforts will likely draw upon traditional AML regulatory principles or requirements for compliance.
- Multilateral operational efforts to combat Russian elites, proxies, and oligarchs: The G7, Australia, and the European Commission have created a Russian Elites, Proxies, and Oligarchs (REPO) task force to share information and investigations involving sanctioned Russian actors and targets, their support networks, and their assets. This unprecedented operational cooperation has already led to billions of dollars of real property seized.
The speed, scope, and complexity of these actions, coupled with the underlying ongoing war and repression by the Putin regime, have also led to an exodus of “self-sanctioning” by companies pulling out of Russia. This has been especially noteworthy in the energy industry, with Shell, Exxon Mobile, British Petroleum, and others shutting down operations in Russia even before any applicable trade ban. The challenge is that businesses exiting Russia have to consider many items when closing down operations, including contracts and employees; Treasury has recognized this with a series of General Licenses that authorize steps to wind down operations.
As more countries continue to adopt stronger sanctions against Russia, Russian authorities are ratcheting up predictable countermeasures. These include sanctioning of senior leadership in the U.S. and other countries; intensifying crackdowns on opposition within Russia—including detention of U.S. citizens and other foreign nationals; and threats to nationalize or expropriate the assets of foreign companies exiting the country or opposing Russia’s war in Ukraine.
The impact of these developments related to the sanctions campaign against Russia has already been substantial and widespread—for Russia, the global economy, and broader collective security interests:
- For Russia, sanctions have crashed the value of ruble; dramatically restricted payments into and out of Russia; dried up Russian access to technology and consumer goods; and by most accounts, are having a devastating effect on not only specifically sanctioned actors, but the Russian economy and people as a whole. This has significantly pressured the Putin regime and imposed severe consequences for his war in Ukraine, regardless of the military outcome.
- For the global economy, sanctions against Russia have clearly contributed to surging energy, food, and commodity prices and will complicate global efforts to combat inflation while managing an economic recovery from the world-wide COVID pandemic.
- For broader collective security interests, Russia’s invasion of Ukraine and the ensuing sanctions campaign have rapidly provoked a 30-year reawakening of cold war geopolitics. Beyond Russia and Ukraine, this crisis has resurfaced the divide between democracies and open societies on the one hand and authoritarian regimes on the other. As the crisis unfolds, this broader context may inform tactical and strategic decisions about potential deglobalization—possibly exacerbating growing tensions with China, complicating potential reproachment with Iran, and elevating micro- and macro-economic geopolitical risks.
These substantial and evolving consequences of the ongoing sanctions campaign against Russia raise important and complicated policy questions that will likely influence the sanctions campaign moving forward, particularly with respect to targeting, licensing, and secondary sanctions. These substantial and evolving consequences of the ongoing sanctions campaign against Russia raise important and complicated policy questions that will likely influence the sanctions campaign moving forward, particularly with respect to targeting, licensing, and secondary sanctions. Already accompanying many of the U.S. actions summarized above were authorizations from the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) to provide wind-down periods, divestment opportunities, and general licenses to minimize negative externalities associated with sanctions against Russia.
Finally, as sanctions against Russia continue and intensify, so will Russia’s efforts to evade such sanctions. On March 7, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued an alert for “all financial institutions to be vigilant against efforts to evade the expansive sanctions and other U.S.-imposed restrictions implemented in connection with the Russian Federation’s further invasion of Ukraine.” Such evasion techniques exploit both longstanding deficiencies in global AML/CFT regimes and new vulnerabilities associated with evolving payment systems, e-commerce relationships, and virtual assets.
All of these rapidly unfolding developments related to the global sanctions campaign against Russia’s war in Ukraine have created a global environment of unprecedented sanctions complexity. This is particularly true for FIs with interests, operations, customers, products, services, or correspondents exposed to Russia, reliant on global markets impacted by sanctions, or vulnerable to Russian sanctions evasion.
Managing sanctions-related compliance obligations and broader enterprise-wide risks in this complex environment can be extremely challenging. To assist FIs navigate this evolving environment and improve the effectiveness and sustainability of counter-illicit financing more broadly, we have outlined practical and strategic sanctions-related, risk management considerations below.
PART II: Sanctions-Related Risk Management Considerations for Financial Institutions
Barring unforeseen developments, FIs have likely entered a new normal of sanctions compliance and risk management. Given the speed at which sanctions against Russia have been imposed, the different types and levels of restrictions and controls from various sanctioning authorities with overlapping jurisdiction, and the number of permissions and exceptions to work through, FIs will face immediate and longer-term sanctions compliance and risk management challenges. FIs should meet these challenges through a series of pragmatic steps that establish a basis for a more transformative network solution.
At a pragmatic level, there are seven areas in which FIs should focus to make sure they are prepared to comply with new and emerging sanctions-related requirements against Russia:
1. Tracking Sanctions Against Russia and Related Developments. As evident from the summary of sanctions-related developments covered in Part I above, tracking the evolving sanctions policies, programs, requirements, risks, and enforcement actions related to Russia is a significant and critical undertaking. Sanctions are a tool of foreign policy and change as rapidly as that policy. FIs should assign or create a position, team, or task force accountable for tracking these developments and ensuring that relevant information is assessed, shared, and actioned as necessary by relevant business, risk, compliance, and executive management teams.
2. Mapping and Evaluating Risk Exposures. FIs should protect their operations, relationships, and reputations by incorporating specific Russia-related risks and general exposure to Russia into their geographic and sanctions risk assessment processes. This should include enterprise-wide risks assessments and specific customer, product/ service, and delivery channel risk assessment and risk rating processes. With the world’s attention trained on Russian activities, FIs that fail to manage these risks may face not only regulatory scrutiny but also public backlash.
For FIs, the saving grace is that while the current sanctions environment escalated with unprecedented speed and complexity, the risks regarding Russia have been apparent for many years, and particularly since Russia’s 2014 annexation of Crimea. Those known risks hopefully mean that most FIs are already meeting the moment from a position of strength in their sanctions-related compliance and risk management controls.
3. Screening for Sanctioned Actors and Geographies. As sanctions continue to expand rapidly against designated Russian targets, FIs should:
- Update sanctions lists in a timely manner—ideally no more than 24 hours after the date of a list update—and include all relevant sanctions lists in FI screening platforms;
- Distinguish among Russian targets subject to asset freezing measures (e.g., OFAC’s SDN list); those subject to financial prohibitions (e.g., OFAC’s CAPTA list); and those subject to certain financial restrictions (e.g., OFAC’s SSI list);
- Include shadow SDNs and other officially unlisted but sanctioned parties that are owned (or controlled in the case of EU and UK sanctions) by those that are listed—particularly with respect to designated Russian oligarchs, who may exercise ownership and control over substantial business interests, including through related parties;
- Ensure the software screening programs are updated and include control lists issued by the Bureau of Industry and Security at the Department of Commerce; and
- Test screening processes to ensure appropriate application of all sanctions lists and any relevant thresholds and to ensure all relevant data is screened.
- FIs should also expand their geographic screening approaches to include the Ukrainian regions of Donetsk and Luhansk, which, like Crimea, could surface in transactions and relationships marked for Russia or Ukraine. This unfolding campaign will continue to present extraordinary implementation challenges for financial institutions (FIs) and the underlying global economy.
4. Monitoring for Sanctioned Activities and Sanctions Evasion. For the foreseeable future, Russia is going to be more unplugged from the international financial system and disconnected from the global economy. However, Russian entities and interests, sanctioned and unsanctioned, will continue seeking access to major capital and financial markets, as well as avenues of trade.
FIs should expect that traditional non-transparent practices regarding shell companies, nominees, heavily intermediated relationships, and elongated payment chains will continue to be used by Russian sanctions targets to maintain access to the global marketplace and circumvent Western sanctions. In addition, Russian sanctions targets will seek jurisdictions and institutions with geopolitical motives or higher risk appetites that are willing to take such business or that lack effective sanctions compliance regimes and controls. This further complicates monitoring challenges for FIs, which should look for direct and indirect exposure to sanctioned Russian parties and sanctioned activities, including with respect to trade and trade finance, and including through correspondent relationships. Finally, FIs should monitor for Russian sanctions evasion in or through virtual assets such as cryptocurrencies, and through e-commerce and rapidly evolving payment systems.
5. Conducting Enhanced Due Diligence and Targeted Investigations. FIs should be prepared to conduct enhanced due diligence and targeted investigations when and where risks related to sanctions against Russia arise. FIs should fully understand the ownership structure of any companies related to Russia, any shell companies, and any relationships involving nominees, proxies, or third-party enablers—such as fiduciary agents, legal advisers, and financial advisers. FIs should monitor such companies for any transactional, structural, or ownership changes—which may include new shareholders or issuance of new shares. Depending on the extent and importance of Russia-related exposure and risk tolerance, FIs may consider developing, acquiring, or outsourcing particular expertise in assessing and investigating Russia-related risks. Such expertise may also be critical to dispositioning more sophisticated Russia sanctions-related risks triggered through screening or monitoring processes.
6. Enhancing Internal and External Information Sharing and Collaboration. Facing the extraordinary complexities of the new normal, FIs should examine ways to strengthen internal and external information sharing and collaboration. Essentially, FIs need to have a clear understanding of their exposure to Russia and Russian interests. Internally, FIs should:
- Address Russia sanctions-related risks and controls through an integrated financial crimes risk management approach that taps expertise and capabilities across traditional sanctions, AML/CFT, anti-bribery and corruption (ABC), and fraud risk domains, as well as between policy and operational teams;
- Integrate this highly dynamic compliance and risk management responsibility with the business, which is critical to delivering current, accurate, and complete information about customer, product, and market risk;
- Routinely inform senior executive management of ongoing, substantial developments related to sanctions against Russia, particularly as such developments impact the FI’s risk profile, and ensure that senior management adequately resources the compliance, risk, and control functions to implement new sanctions-related requirements; and
- Brief the board of directors as to the complexity of the current environment and the impact that the sanctions campaign against Russia may have on the FI’s risk profile, while also seeking clarity on how this may inform the FI’s risk tolerance and business strategy.
Externally, FIs should strengthen information sharing and collaboration in identifying and addressing Russia sanctions-related risks by:
- Fully utilizing shared risk management opportunities with domestic correspondents, including through information sharing relationships authorized under Section 314(b) of the USA PATRIOT Act;
- Leveraging enterprise-wide risk assessment processes with foreign affiliates;
- Working with industry trade associations to develop a collective understanding of risks and compliance best practices and potentially share compliance and risk management resources—such as lists of Russian shadow SDNs and emerging case studies or typologies of Russian sanctions evasion;
- Creating shared risk management processes with strategically important and vulnerable corporates, such as those operating in global energy markets or with direct or counterparty exposure to Russia; and
- Pursuing aggressive outreach with law enforcement and regulatory authorities to address any significant emerging risk or compliance issues associated with the evolving sanctions campaign against Russia.
7. Reviewing, updating, and strengthening as necessary sanctions-related policies, procedures, and training. Given the complexity and importance of the evolving sanctions campaign against Russia, FIs should review, update, and strengthen as necessary their sanctions-related policies and procedures as new information emerges. They should train staff accordingly to understand new sanctions-related requirements and their impact on risk management processes, including with respect to the six steps outlined above. FIs should also ensure an enterprise-wide cultural commitment to sanctions compliance and risk management with respect to Russia and more broadly, including through general awareness training. Finally, FIs should ensure they have adequate expertise to manage evolving sanctions-related risks, including through training, testing, and certification programs for those charged with specific responsibilities to implement sanctions-related controls.
Conclusion: A Strategic Opportunity for Transformation
Russia’s invasion of Ukraine and the sweeping global response represent a clearly historic moment. The importance of combating Russian aggression and the bravery of the Ukrainian resistance have united and galvanized the United States and its allies in a manner unseen since 9/11.
FIs can capitalize on this momentous political will to help drive effective implementation of the sanctions campaign against Russia. Such effective sanctions implementation can demonstrate the power of financial and economic measures to combat violent aggression and defend our collective security. To do this both systemically and sustainably, FIs will need help to fully leverage the potential of global AML/CFT regimes, the application of new technologies, and a unified or strongly coordinated approach to Russia sanctions-related targets and risks. In short, FIs will need a network solution.
A network solution should bring together relationships, information, tools, and expertise necessary to effectively implement and continuously advance the sanctions campaign against Russia. U.S. FIs can begin building such a network solution by:
- Establishing an enterprise-wide Russia sanctions task force that draws from any relevant branches and affiliates with Russian exposure and integrates compliance and risk management subject matter expertise with market intelligence from the business;
- Creating joint Russia sanctions implementation and risk management teams with strategically important and sanctions-committed customers exposed to Russia, Russian elites, or sanctioned parties;
- Fully utilizing existing 314(b) information-sharing authorities to create integrated FI analyst task forces, prioritizing relationships with correspondents that have shared exposure to Russia;
- Expanding integrated FI analyst task forces to include technology and managed services companies that can assist such task forces in analyzing information related to Russia sanctions risk and identifying sanctioned networks;
- Connecting integrated FI analyst task forces with public sector counter-illicit task forces, including at local, state, and national levels—such as with Task Force KleptoCapture, an interagency law enforcement task force led by the U.S. Department of Justice and dedicated to enforcing sanctions-related measures against Russia; and
- Utilizing sanctions task force experiences to develop or support recommendations to improve tracking and tracing of sanctioned parties, networks, and assets through ongoing AML reform that enhances the transparency of the financial system.
Establishing such network relationships will facilitate greater information sharing, analysis, and action to drive more effective implementation of sanctions against Russia, including across each of the seven steps summarized in Part II above. These network relationships can be extended cross-border, including in collaboration with the REPO Task Force, to further advance the effectiveness of sanctions implementation and risk management.
Creating such network solutions requires leadership from FIs and systemic political will. Global support for Ukraine may provide the momentum necessary for creating a network solution to drive more effective implementation of sanctions against Russia. Such an outcome could open the door for broader transformative efforts to improve the effectiveness and sustainability of counter-illicit financing regimes. As cold war fractures reappear, investing in such transformative efforts will become more important; not only for meeting compliance obligations, but increasingly for protecting our national and collective security.