Stress levels are high among compliance and risk managers at U.S. banks as they deal with ever-tightening sanctions and exposure to the heavily devalued ruble amid Russia’s continuing assault on Ukraine.
Just last week, the Treasury Department's Office of Foreign Assets Control added dozens of Russian government officials and companies to its sanctions list. And House Financial Services Committee Chair
"Like everyone else, including policymakers and regulators, banks are struggling to keep up with the changing sanctions environment,” said Jamal El-Hindi, counsel at Clifford Chance and a former deputy director of the Treasury Department’s Financial Crimes Enforcement Network.
Fincen recently announced the formation of an international working group for sharing intelligence on any illicit financial activities related to Russia. On March 7, Fincen
The biggest challenge is figuring out what to do with existing transactions and relationships involving multiple jurisdictions that have been touched by sanctions, or which may get swept into the scope of sanctions in the near future, he said.
Another challenge is coping with trades that are due to settle in rubles at some point in the future.
While much of this work involves judgment and business decisions, technology can help. For instance, artificial intelligence can help analyze transactions for signs of sanctioned people or entities that are trying to cover their tracks. It can help banks understand and limit their exposure to sanctioned entities and to the ruble.
“Technology can play a major role in this, and I would say it’s a one-to-one relationship — the bigger you are, the more technology you should probably have,” said Tim White, director of sanctions at AML RightSource. “Simple math says the more names you put on a list, the more false positives you're going to have, and the bigger your account base, the more false positives you're going to have. And this is all time sensitive.”
Bank clients have reached out in recent weeks to AML RightSource, a compliance consulting and technology company that bought the sanctions screening and anti-money-laundering software provider QuantaVerse last year, to ask about what they should be aware of and how they should be doing risk assessments, White said.
Joel Lange, head of business management at Dow Jones Risk & Compliance, said the systems that banks have today “are mostly adequate to handle the multitude of updates to lists by the various sanctions bodies over the last few weeks.” Banks typically get this data from compliance data providers.
The hard part, in Lange’s view, is meeting government recommendations to block exports to Russian state-owned companies that may not be sanctioned and identifying Russia connections across various books of business.
“Many organizations have sophisticated systems for this, but even some large organizations are tracking their exposure in internal spreadsheets,” Lange said. “There is clearly an evolution at the moment from risk-based checks to more holistic checks, and compliance software workflow tools will need to evolve with this moment.”
Reducing exposure to Russians and rubles
A network of 12 banks has been working with the tech company Capitolis to reduce exposures to the Russian ruble through the company’s trade-compression platform.
The sanctions on Russia have a “meaningful implication” on trade settlement, said Capitolis CEO and founder Gil Mandelzis. Wherever banks have trades on their books for which they will have to deliver or receive rubles at maturity, there’s a lot of uncertainty about how that will play out.
The 12 banks upload information about their trades to Capitolis, which analyzes them to come up with “optimization solutions” or mutually beneficial financial transactions that will help the participants reduce their risk. It proposes the solutions to them through its platform.
“We've employed Capitolis's netting services,” said Sharon Kim, executive managing director and co-head of global foreign exchange at TD Securities. “The fear of a disruption or seizing of the settlement system has made the movement of payments quite challenging in certain markets. The netting events we've participated in allow us to reduce some of that operational risk.”
Overall, about 100 banks use Capitolis’s software, including JPMorgan Chase, Citigroup and State Street.
Finding oligarchs’ hidden assets, shell companies
Every bank has to run the OFAC sanctions list against its customer list to make sure it’s not serving anyone there, and make sure it’s keeping up with additions to the list. Companies that provide OFAC screening software include Abrigo, AML RightSource, ComplyAdvantage, CSI, Experian, LexisNexis Risk Solutions, Oracle, Promontory, Protiviti, Refinitiv and PwC.
Because so many sanctioned people and companies are good at hiding or laundering their financial activity, banks have to go beyond the simple process of matching names to a list. They have long used anti-money-laundering software to analyze transaction data for signs that transactions that on the surface look legitimate are really originating from bad actors skilled in evading money laundering rules and sanctions. Providers in this area include AML RightSource, ComplyAdvantage and Silent Eight.
Russia’s leaders and oligarchs and their attorneys have become especially skilled at evading sanctions over the years. They know, for instance, to keep their ownership of companies under the 50% level that triggers sanctions. They give partial ownership of assets and businesses to family members, trusted friends. They use shell companies that nest within one another like
AML RightSource’s Arachnys group has what White calls a “supercharged web crawler” that uncovers shell companies and their layers of ownership. The company’s QuantaVerse software uses artificial intelligence software to analyze patterns to detect obfuscated ownership of companies and assets. HSBC and BNP Paribas are among the company’s clients.
Another provider of AI-based software in this area is Silent Eight. Its AI learns how compliance analysts in banks perform their duties, then recreates their process in software and runs it at high speeds. Where a human might be able to handle 100 cases a day, the software can handle 2 million daily, the company says.
A little over a year ago, HSBC announced a multiyear partnership with Silent Eight to provide compliance technology for dealing with financial crime. Standard Chartered Bank also uses the software.
“It removes the human limitation from the equation,” said Matthew Leaney, chief revenue officer at Silent Eight. “And the human limitation, in our view, is what destroys all of the incredible work and all the incredible amount of capital that are deployed against this financial crime and terrorist finance problem.”
The software can detect the Russian oligarchs behind transactions and hand that information to an analyst at a financial institution who decides what to do with it, Leaney said.
For example, in a part of Miami Beach that is sometimes called “Little Moscow” or “Moscow by the Sea” because so many wealthy Russians have bought real estate there, a buyer recently bought a condo sight unseen using cryptocurrency, Leaney said. The apartment closed in record time and was put back on the market within 30 days at a discount, with the purchase price to be paid in dollars.
While the initial purchase did not look sketchy, “when you look at all that together, it looks a lot more suspicious, a lot more worthy of time,” Leaney said. “Technology like ours pulls in all those different data points” to draw out the red flags, he said.
Software can also help determine where a transaction falls in more complex sanctions. For instance, in some sanctions, transactions for humanitarian relief, food or consumer telecommunications are OK, but commercial transactions are not, White said.
“It's not just a match game,” he said. “It becomes heavy-duty research, and it’s very tedious. There are software programs that enable the automated analysis of this.”
There’s pressure on compliance departments to handle sanctions efficiently, White pointed out, “because compliance isn't making anybody any money, but it's keeping you out of hot water.”
The largest monetary penalties banks have faced have been for sanctions violations. In 2014, BNP Paribas was fined nearly $9 billion by U.S. state and federal authorities for sanctions violations.
