As EU ambassadors meet in Brussels to consider the bloc’s 14th package of sanctions targeting Russia’s war machine, banks are struggling to keep pace with the unprecedented breadth and often contradictory aspects of the various international programmes rolled out since the start of the conflict two years ago.
“The Russian sanctions programme is five times larger than the Iran sanctions programme which took a decade to put in place,” said William Rich, head of banking client sanctions at Citi, at a packed panel session on economic and trade sanctions at the EBRD’s annual meeting in Yerevan.
“Ninety-eight per cent of Russian sanctions have occurred in the last two years. It is a different scale and rate of change.”
Rich noted that the divergence in the sanctions programmes of the US, UK and EU — in terms of what is restricted and what is exempted — makes life challenging for banks such as Citi that operate in all three jurisdictions, an observation echoed by other panellists.
“Contradictory sanctions rules negatively impacts implementation,” said Elitza Kavrakova, group head of institutional clients at Raiffeisen Bank International, adding that the regulators are not “fully aligned”.
Just within Europe, there are also different interpretations by national authorities of who is the ultimate beneficial owner who either directly or indirectly reaps the benefits of owning an asset, creating complications within even basic transaction banking operations.
“One country [in Europe] says the final UBO is [person] X while another country says it is person Y, even within the [same] European restriction,” said Michael Strotmann, senior legal advisor for financial sanctions at UniCredit. Citing a famous quote by former US secretary of state Henry Kissinger, Strotmann said: “There needs to be a number I can call in Europe to get me an answer.”
Every day individuals are trying to find new ways to circumvent sanctions, said Martial Smets, director at ARGOS Advisory and Audit. “In order to be able to control this appropriately, we need to understand the end-to-end transaction, where it started and where it ends. For all payments [banks] need to apply the same due diligence as for trade finance — they need to understand the origin, destination, the roots, the details of the transaction for every single payment, which is extremely complex and time consuming.”
Smets said the US’s 14114 executive order, announced in December, adds another layer of complexity for banks as “any type of involvement with the Russian economy could lead to sanctions”.
Kavrakova said that greater co-operation was needed between banks, regulators and state authorities — especially customs and excise authorities — to get an end-to-end view on trade flows, noting that the banks struggle when it comes to trade financing.
“I can only rely on what my corporate client is saying and what the issuing bank is confirming. I’m not sure we have a tool to control where is the real end destination of the goods. As a commercial bank [we do] not know right now,” she said.
Rich added that the extraterritorial aspects of sanctions makes for some difficult conversations with clients and regulators. “Risks are popping up in places we’ve never had before,” he said.
Correspondent banking
Sanctions are also impacting correspondent banking relationships, which Kavrakova said increasingly require senior management attention.
“Correspondent banking ceased a while ago to be only about payments,” she said. Banks need to know the risk appetite of potential correspondents in order to define their own risk appetite. But the challenge, she said, is understanding the appetite of the “correspondent’s correspondent”.
Arakel Meliksetyan, head of the Central Bank of Armenia’s financial monitoring centre, said that banks need to strike a balance between their need to make money and their ability to digest or minimise risk to acceptable levels. “The counterbalance is the prerequisite for good health,” he said.
“The biggest difficulty is where there is a disconnect between the correspondent bank and Citi,” said Rich. “[If] we don’t understand why they are doing something, we have to take action pretty quickly if it is outside our risk appetite.”
Rich said that while Citi had tried some innovative ways of using data to minimise risks, most trade data is not accessible in real time, which for sanctions compliance is not good enough.
Adding to the complication, he said, is the introduction of trade sanctions by the EU and the UK, which he said are different to export controls.
“Export controls we’ve been dealing with for 20 or 30 years. Trade sanctions are different in that they are linked to the financing of trade which implicates the financial institution,” he added.
Trying to comply with trade sanctions by adding more data into payment screening resulted in a lot of false positives, said Rich. “It is an area where we are looking for additional guidance and best practice,” he said. “No bank has mastered complying with trade sanctions. The only real solution we’re able to provide is better knowing customers.”
