During the last two weeks, the United States (US), the United Kingdom (UK), Canada and the European Union (EU) have hit Russia with severe financial sanctions following President Vladimir Putin’s invasion of Ukraine. Gabriel Cozma, Head of Consulting at the Lysis Group states that, “During my extensive career, I have never seen this level of financial sanctions being imposed on any country from such a united global front.” He refers to this as “unprecedented”.
According to the Financial Conduct Authority (FCA) in the UK, financial sanctions are imposed by governments and prohibit organisations to transact with targeted individuals, entities or governments, locally or abroad.
The objective of these sanctions is to cripple financial systems, targeted individuals and entities by not allowing them access to financial transactions; and this is exactly what is happening in Russia with the Ruble loosing substantial value and the stock market tumbling dramatically.
Setting new standards
To further clamp down on the corrupt elite, including Russian oligarch, and dirty money in the UK, new legislation has been fast-tracked to Parliament on 1 March 2022. The government has introduced the Economic Crime Bill which aims to prevent foreign owners from laundering their money through the UK property market. Gabriel elaborates by saying that “This type of legislation is long overdue but has the potential to pave the way for new global standards regarding transparency”.
The new measures far extend prior restrictions and will require anonymous property owners in the UK to reveal their identities which will increase the likelihood that criminals are exposed and cannot hide behind shell companies. Sandy Gill, Associate Director at the Lysis Group adds that the newly introduced Economic Crime Bill will also strengthen the existing Unexplained Wealth Orders (UWOs) legislation substantially.
Under the Proceeds of the Crime Act in the UK, the authorities have the ability to confiscate money from crime, and they do this through the UWOs, which are currently being used against targeted Russian oligarchs in the UK. UWOs require an individual, who is reasonably suspected to be involved in crime, to declare the nature and extent of their assets including their interest in property as well as how this was obtained. Although the UWOs has been in place since January 2018, the use thereof has been limited.
A cohesive approach
In terms of the swift response from the global community regarding the implementation of severe financial sanctions against Russia, Sandy states that this has been enabled by the strong international anti-money laundering (AML) and sanctions infrastructure that already exists and was previously used for countries such as Afghanistan and Syria.
Gabriel adds to this and predicts that “This type of cohesive cooperation regarding financial sanctions and the monitoring of AML systems across the globe, is something we can expect to intensify in future because of the increase in multinational business activities”.
Historically there were two leading regulators namely the US and the UK where regulations were generally set; first in the US and then filtered to the UK after which the EU would implement regulations. However, during 2021, the EU established their own Financial Intelligence Centre (FIU), which is the equivalent of the FCA in the UK. The objective of this institution is to implement standardised AML legislation across the EU which will increase the effectiveness of monitoring and managing AML activities.
The impact of third-party payment systems
In yet another attempt to stop the Russian economy in its tracks, the US, UK and EU recently agreed to exclude numerous Russian banks from the Society for Worldwide Interbank Financial Telecommunications, better known as Swift. This international payment system is used by thousands of global financial institutions to transfer money and with the exclusion of Russia, a clear message of intolerance was sent to world leaders.
Gabriel responds to this by saying “Although Swift is a major player in the third-party payment environment, they are not the only platform of this kind. Actually, with Swift being removed from the equation, other similar systems are set to become more prominent and then there is the rise of crypto as an increasingly viable alternative to fiat money”. He continuous by saying that this could potentially steer an even bigger portion of monetary funds that previously circulated through the traditional banking system to untraceable transaction platforms.
Jon Sweet, Lysis Group CEO, comments by saying “There is already a big shift to convert Ruble to crypto currency and this will place enormous pressure on crypto asset organisations around the world. Volumes will rise and more fiat-to-crypto exchanges will involve sanctioned entities and individuals, leading to increased sanction hits and false positives as well as a spike in transaction monitoring hits (both real and false). Organisations will have to rely on their systems and data sources and can expect a significant increase in compliance efforts while the new reality filters through the system”.
Gabriel expands and adds that crypto assets, in general, are becoming a preferred source for conducting transactions and although there are existing regulations in place for crypto in certain countries, the institutions themselves are not all regulated as yet. In fact, he states that Russia and China are well on their way to create a similar platform to Swift, but he expresses concern for this possibly not being regulated effectively.
Gabriel points out that “The recent invasion of Ukraine by Russia definitely highlights to need for organisations, across the world, to review and refine their existing AML screening and monitoring technologies.
From a consulting perspective, Lysis has the expertise and processes to review organisations existing measures against sanctions and advise if improvements are needed. Secondly, Lysis is geared to actually manage organisations’ business operations by providing trained analysts that can screen and flag suspicious transactions on their behalf. In the short-term, we expect to be very busy with additional due diligence and alert management interventions. In the medium-term, we expect a large number of organisations and industry sectors to realise the need for stronger processes and systems”.
Organisations constantly run the risk of processing transactions from sanctioned individuals, entities or organisations. When this happens, the financial institution will not only receive a substantial fine, but the reputational damage linked to this will be even more severe; both for the company and the executive team in charge.
According to Jon “Any sanctioned process is likely to deliver a high number of false positive identities which will create a large spike in the workload of compliance staff. Also, due to recent events, there will be an increased focus from regulators on the quality of organisations’ customer and payment screening and due diligence with very little room for leniency”.
Formed in 2001, Lysis has offices in the UK, US, France, Germany, Ireland, Hong Kong, Singapore, Australia and South Africa. Lysis supports financial markets firms and firms in other regulated markets with Expert Governance Risk and Compliance operations and technology strategy, operating model, framework, regulatory intervention and change services; CLM/KYC process execution; and AML & Risk training.