The day the sanction call comes
What practical steps do banks have to take when a client falls foul of a sanction list?
It might be a blanket ban on dealing with that country, or the appearance of an individual on the sanctions list of a particular foreign jurisdiction. But when it happens, what is next? What is the procedure that day? What is the first call?
People are exceptionally cagey about this subject, but a few themes emerge from conversations with the industry.
First off, powerful individual sovereigns such as the US or UK, or collectives such as the European Commission, publish lists of sanctioned individuals.
These rosters are growing fast. On March 15, the UK added 370 individuals to its sanctions lists, including Alfa Bank co-founder Mikhail Fridman and 50 other oligarchs and their family members.
The message will be unequivocal: From this point on, any business the firm does with you is non grata, and any further business is verboten
That information then cascades down through a bank. If it has worked with a newly sanctioned individual by, say, helping them manage their wealth or providing credit lines to an investment firm they own, those accounts are frozen forthwith.
“We have the functionality in place to block anything that guy does in our systems,” says a private banker at a bank focused on central and eastern Europe. “The block goes straight into the system, and no one can carry out a transaction without compliance approval.”
Once the “initial shock of compliance”, in the words of one sanctions expert, washes through a financial institution, the next thing it does is talk to the client – who, given the situation in eastern Europe, will likely be unsurprised to receive the call, probably from a primary client-focused relationship manager.
The message will vary in tone but be unequivocal in its meaning: From this point on, any business the firm does with you, a specially designated national and blocked person, is non grata, and any further business is forbidden.
A bank must cease communication and leave frozen funds untouched in accounts connected to that individual.
The grey area is whether a banker gives any advice to a sanctioned individual about what their next step might be. For some banks in London, the Nordic region and central Europe, these personal relationships run long and deep.
Sanctioned oligarchs have reached out in recent weeks to long-time banking providers. Euromoney has spoken to seasoned wealth managers in this camp. Likewise, there’s no doubt big financial providers have had conversations along the lines of: We can’t help you for the foreseeable future, but there’s nothing to stop you from taking your business elsewhere.
These little friendly chats do take place, no matter how much banks might say they don’t.
Banks know the challenges the oligarchs face and are willing to speak on condition of anonymity. Most firms insist they pulled back sharply from serving Russian oligarchs in the wake of Moscow’s annexation of Crimea in 2014. Since then, restrictions on what kind of client they can do business with have tightened, first into a loose collar, then into a clinch.
But not all of them stepped back completely. The wealth of Russia’s richest men and their families has soaked into every nook and cranny of the developed financial world; locating and squeezing it out will take time.
With all this in mind, it has been instructive, through all the recent testimony from Timothy Leissner about 1MDB and Goldman Sachs, to learn that had Goldman’s compliance department been listened to, none of what followed in that scandal would have happened. The compliance team was adamant Goldman should not bank Jho Low, and it only happened at all by outright deceit.
Most banks have some direct experience with individual bad-guy sanctions. But nothing could have prepared them for this
But there are a couple of problems with this ‘it couldn’t happen to us’ narrative.
One is that a lot of client relationships long predate this more cautious period. The business a bank did with a now-sanctioned oligarch may harm it in the eyes of customers and perhaps even result in regulatory fines far in the future.
In early March, it was revealed that Credit Suisse asked hedge funds and other investors to destroy documents relating to loans made to Russian oligarchs, later subjected to US sanctions.
Another problem is that the list of people on various sanctions lists will grow. So, banks also have to figure out if it is worth doing business with, say, the owner of a Siberian supermarket chain who was once photographed with Vladimir Putin.
A third is that once sanctions start applying to an entire country rather than a handful of oligarchs, a lot more clients are necessarily going to be caught up in the net.
It is now glaringly clear that a lot of banks didn’t see the invasion of Ukraine coming, or at least not on this scale. Know-your-client concerns typically focus on participation in particular industries or tax evasion issues or questions of money laundering: precise concerns that can emerge in due diligence.
But connections to a regime that invades another sovereign state? That requires a geopolitical read, not scrutiny of some obscure offshore accounts.
Most banks have some direct experience with individual bad-guy sanctions. But nothing could have prepared them for this.
“Russia is one of Europe’s main trade partners, so everyone has some kind of exposure through clients,” says one Dutch sanctions expert.
One thing bankers can’t immediately do once a list is published, is get a targeted client off their books. Legally, they can’t move or even touch assets under their advice or custody once a sanction is applied.
This is similar to the issues at sovereign wealth funds: it is one thing for Norwegian, Australian or Singaporean governments to say their funds are pulling out of Russia, but in practical terms it is quite impossible to do so. Any such effort must wait until sanctions are lifted, and the very process of lifting sanctions would imply that the circumstances that prompted a bank to want to ditch a client or market no longer apply.
Which brings us back to regulators.
Banks want to show intent. Of all the things they fear, two in particular stand out: being penalized financially to the full letter of the law, and having their reputation dragged through the mud.
They want to be seen as staying on the correct side of the law – and of lines that move and extend, seemingly every week.
And that is why, when regulators from the UK to Singapore to the US issue new be-careful-be-scared lists, the first call a bank’s sanctions team makes is to the regulator to make sure they’ve done everything right and nothing wrong.