Governance, risk & compliance
Nicolas Véron, senior researcher at the Peterson Institute for International Economics.
All change for today’s bankers Beyond these specific challenges, you only need to speak with Gutierrez for a short time to understand the impact sanctions are having on the broader banking industry. “I’ve got to communicate prohibitions to clients because, of course, they’re not connected to the US Department of Treasury to receive email alerts; but I am and their noncompliance would have a reputational risk for our bank,” he says. This, he says, is yet another example of the additional work he and his colleagues are having to do each time a new sanction is announced. It is changing the day-to-day relationships banks have with their clients, Gutierrez adds – and the role people like him play in those relationships. For Gutierrez, and his colleagues across the US,
make sure they sent it and that the customer had read and acknowledged receipt of it. That’s out of our day-to-day.” And as Gutierrez adds, if that’s what a mid-sized bank like his had to contend with, just imagine the workload of a global institution on Wall Street or in the City.
80% S&P Global 46
In addition to all these prohibitions, meanwhile, banks have a number of active obligations, especially around checking if a transaction in Russia is genuinely linked to humanitarian concerns. Humanitarian transactions – such as those by non- governmental organisations working in Crimea or disputed regions of mainland Ukraine – are permissible, albeit with strict rules. “You want to be able to trust your customer, but how do I know that a certain transaction with a bank in Russia has to do with humanitarian aid?” Gutierrez asks. “We would have to stop that wire, request supporting documents, read and analyse them. If we still have questions because of the ambiguity in, say, the bills of lading or any other supporting documents or letters that the customer provides us, we would have to go to our general counsel for legal advice, which is very costly.”
The percentage of assets held by Russian commercial banks that were targeted by sanctions, as of March 2022. The value of those assets exceeded €1trn, around four-fifths of total assets held by the sector at the end of September 2021.
At the same time, Gutierrez highlights the patchwork nature of international sanctions and the difficulties that are presented to him and his industry. Unlike so-called ‘Western’ allies, after all, many Latin American countries are not imposing sanctions on Russia. “That’s our backyard, where we have customers and where we do banking,” he says. “That worries me a lot.” For his part, Gutierrez says that many of these nations lack a legal framework, similar to those of the US, UK, EU and their allies, to impose and enforce such sanctions. “In South Florida, compared with 2020 and 2021, we’ve seen an incremental rise in the volume of transactions coming from Latin America,” Gutierrez says. “That in itself tells you a lot.”
“OFAC Friday” is really a thing. Just as they begin to look ahead to the coming weekend, OFAC announces another round of prohibitions, meaning their plans have to change and more time is spent at the office ahead of Monday morning. At a time when so much is uncertain, planning is arguably the last thing you can do – but the first you should be doing. In Europe, the picture is complex and unique, on a bank-by-bank basis, Véron says. Here, banks have varying degrees of exposure to Russia and the sanctions imposed against it, making it difficult to truly say, and indeed generalise, on what impact events of the last few months have had. “I’m sure there were moments of chaos and improvisation in many corners of the system,” he says.
Some banks have limited their exposure by selling off their Russian subsidiaries. Others have reviewed their affiliations with Russian partners, or else reflected on the exposure of their clients. “I think there’s been a lot of learning, high levels of mobilisation of staff and management resources on this issue; it’s been a high priority,” Véron continues. But, he says, it hasn’t been an event that has brought great instability. Yet banks on both sides of the Atlantic have their work cut out if they want to avoid the “reputational” and legal minefield sanctions bring. Fortunately, the industry as a whole is clearly both adaptable and resourceful, able to decipher and interpret sanctions despite their complexities and react quickly to new prohibitions and guidance – which as Gutierrez suggests, are coming in weekly. Among all the uncertainty, one thing is for sure: things aren’t changing anytime soon. At her European Commission address von der Leyen pretty much said as much: “It is the Kremlin that has put Russia’s economy on the path to oblivion. This is the price for Putin’s trail of death and destruction. And I want to make it very clear, the sanctions are here to stay. This is the time for us to show resolve, not appeasement.” OFAC Fridays, in short, are probably something banks should get used to. ●
Future Banking /
www.nsbanking.com
Peterson Institute for International Economics
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