While Russia’s invasion of Ukraine is not in sight, the conflict risks leaving global banks vulnerable to risks from economic sanctions and export controls for the foreseeable future.
Since Russian tanks arrived on Ukrainian territory in February 2022, the United States has imposed sanctions on at least 3,500 individuals, companies and entities – including Russian President Vladimir Putin himself – according to a report from the Russian Defense Service. research from the US Congress. These sanctions prohibit most major Russian banks from conducting transactions in U.S. dollars or with U.S. organizations. Additionally, the United States has expanded its export controls to harm the Russian economy.
For decades, such U.S.-imposed sanctions have been used as a non-lethal weapon to inflict economic hardship on certain countries, with Venezuela and Myanmar being two recent examples. But Russia’s campaign against Ukraine has led to an intensification of measures. The US Treasury Department, which enforces the sanctions, has no intention of easing its stranglehold.
“As long as the Russian invasion continues, we will impose sanctions and export controls that undermine the Kremlin’s efforts to stockpile goods and technology,” Wally Adeyemo, deputy secretary of the US Treasury, said in an editorial from the FT last year. “By raising the stakes for banks that support sensitive trade with Russia, our coalition is throwing sand into the gears of Russian military logistics. »
In February, following the death in prison of Russian opposition leader Alexei Navalny, the Treasury followed through on the threat and added nearly 300 individuals and organizations to its sanctions list. These new sanctions targeted entities from 11 other countries, including China, Liechtenstein and the United Arab Emirates. Additionally, the Treasury sanctioned five investment and venture capital funds that finance Russian technology, as well as six financial technology companies that provide software to Russian financial institutions.
But this deluge of sanctions worries bankers. Many in the sector believe that the more sanctions there are, the more bankers are used as intermediaries to implement them in the financial system.
This carries increasing financial risk. Settlements with the U.S. Treasury for sanctions violations reached a record high of $1.5 billion in 2023, notes Vincent Gaudel, financial crime compliance expert at LexisNexis Risk Solutions. Although no civil monetary penalties have yet been imposed for violating restrictions related to Russia’s invasion of Ukraine, “it is only a matter of time before the first cases appear” , he believes.
“The message conveyed is unequivocal: entities that violate American sanctions against Russia are now suffering the consequences,” warns Gaudel.
Roberto Gonzalez, a partner at law firm Paul Weiss, says this means almost all transactions directly or indirectly involving Russia are at higher risk from a sanctions perspective.
New US sanctions against Russia should target people or entities outside the country who nevertheless contribute to its war, he suggests. This may include “one or more non-U.S. financial institutions that engage in significant defense industry-related transactions involving Russia.”
To make matters worse for bank executives and risk managers, sanctions can be applied even if someone doesn’t know the laws were violated, says Eric Young, senior managing director at security consulting firm Guidepost Solutions. He advises bank compliance officers to cooperate with their counterparts around the world. “It’s no longer a ‘nice to do’ but an essential,” he emphasizes.
Banks should review and update their processes to comply with “know your customer” rules, Young says, and check whether beneficial owners are subject to sanctions.
Young points out that sanctions can affect a wide range of transactions, from payments to trade finance. They can also create vulnerabilities in banks’ vast ecosystems of sellers, suppliers and other counterparties, he adds.
But the Ukrainian conflict is not the only one to present risks of sanctions violations. Other geopolitical hotspots are also attracting sanctions attention.
$1.5 billionSettlements and executions following US sanctions violations in 2023
Several companies in China, for example, have become targets of U.S. sanctions in recent years, Gonzalez notes. There “continues to be a risk that any significant escalation by China involving Taiwan or the South China Sea” could trigger more U.S. sanctions, he said.
Likewise, the Middle East conflict between Iran – including its proxies Lebanon, Syria and Yemen – and Israel could become another focus of US sanctions, Gonzalez believes. “We could see a further escalation of significant sanctions targeting Iran and many of its proxies,” he believes.
Financial institutions should also monitor suspicious activity and potential violations of U.S. export controls. For banks, this could pose a new challenge. Gonzalez says this is “an area of law that, historically, financial institutions have not specifically focused on.”
Other banking activities can expose institutions to these geopolitical risks – cryptocurrency operations for example. As bitcoin and other digital assets gain greater acceptance in the financial system, banks have expanded their operations in this area. French Société Générale, for example, launched its own stablecoin on a cryptocurrency exchange. But, as Adeyemo warned last month, Russia could use cryptocurrencies to evade sanctions.
“We have seen Russia increasingly turn to alternative payment mechanisms – including the stablecoin Tether – to try to circumvent our sanctions and continue to finance its war machine,” he observed.
Whether it’s alternative currencies or new geographies, the frequency of U.S. sanctions updates will only increase over the next two years, or for as long as the war in Ukraine continues. Nor will these be the only measures banks will need to pay attention to. Young says there will be “much closer coordination of other sanctions rules from NATO, Japan, South Korea and other Western countries, which are similar, but not identical, in scope or scope.” their approach.
