Sanctions against Russia: On the Path to Compliance

According to Eurostat figures, the European Union (EU) is the biggest trading partner of Russia with European countries importing 84% of Russia’s oil exports and about 76% of its natural gas. If tougher sanctions against Russia get introduced, the potential ramifications of these restrictions could have lasting impact on the operations of financial service providers in Europe.

Even a minimal nexus in transactions with US sanctioned entities can create liability. Activities to watch include on-boarding sanctioned individuals or entities; clearing transactions in US dollars (USD); providing financial services through institutions in the United States; processing payments through foreign branches of US financial institutions (FIs); or knowingly relying on the services of US persons anywhere in the world to facilitate, participate in, approve, or support restricted transactions.

Additional complications may arise from differences between the focus of a US sanctions programme and a similar programme administered in the EU. Actions taken in the EU that would not be permitted under a US sanctions programme could potentially be construed by US regulators as evasion of the US programme and vice versa. For instance, there will be differences in the sanctions screening requirements depending on the country where these individuals and entities reside.

This will create a host of complications for financial organisations who already need to comply with a complex body of regulatory requirements, primarily current sanctions programmes. The sanctions against Russia will have wider implications on their client on-boarding, transaction screening and exceptions management processes. Notwithstanding any direct penalties for letting sanctions violations take place, there are equally or more damaging consequences linked to the steep increase in compliance spending and diminished customer experience, through slower payments and on-boarding times.

Implementing Changes

To avoid such consequences FIs will need to apply additional scrutiny, not only to their payment processing systems but also to their on-boarding practices and due diligence programmes. Given all of the new regulations, these systems will need to be able to handle additional ad hoc processes that can manage larger volumes of exceptions and provide enhanced due diligence for all sanctioned Russian individuals or entities, including reviewing their existing client base.

For instance, at present, there are sanctions against individuals who are stakeholders in certain business entities. However, even if those sanctions apply to the specific individuals, the businesses they are stakeholders in will also become sanctioned entities. This means that banks will have to go back and identify all individuals that are on the sanctions list as well as their relationships with the business entities that they are linked to. They will also need to ensure that once they identify those individuals, they have smooth processes in place to enable them to discontinue or restrict business with the sanctioned entity to mitigate their risk.

Moreover, as sanctions traditionally have immediate effect, banks will have to implement these changes very quickly. This will require a great deal of agility in how their systems can handle new regulatory changes. To address these challenges, many banks are moving to automation to ensure efficiency and full auditability of their sanctions screening programmes. This includes automating case management and exceptions management, as well as revamping existing know your customer (KYC) and due diligence programmes.

If these changes don’t get implemented smoothly, banks risk creating operational issues such as slower payment processing and time to onboarding of new customers. This will add extra costs to the already strained budgets of financial services providers, not to mention the reputational damage resulting from poor customer experience.

However, what could be more costly is paying hefty fines for non-compliance. Earlier this year France’s biggest listed bank, BNP Paribas, announced that it had set aside US$1.1bn in anticipation of a possible fine for breaching US sanctions on countries such as Iran. Deutsche Bank and Credit Suisse also allocated huge amounts for sanctions screening fines.

As the cost of non-compliance exceeds compliance costs, financial organisations will need to find more effective ways to quickly implement new rules and regulatory changes without causing disruptions to their business.

One of the best ways to achieve that is through automating business processes and implementing the best compliance practices across the whole organisation. By implementing technology based on process automation, banks will be able to easily modify compliance rules and internal policies in response to new regulations and enforce them across the organisation to ensure long-term compliance, while providing auditability of change.

It is hard to predict whether the sanctions against Russia will be effective in changing geopolitics or not. What is more likely is how much sanctions enforcement severely tests FIs. They, rather than the sanctions’ exact targets, are at a greater risk of direct penalties through accidental non-compliance. To avoid that scenario, banks need to streamline their sanctions screening and KYC programmes in a way that allows them to drive consistent compliance without incurring hefty financial losses and compromising on service quality.

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