With no end in sight to Russia’s invasion of Ukraine, the conflict is likely to leave global banks vulnerable to the risks around economic sanctions and export controls for the foreseeable future.
Since Russian tanks rolled on to Ukrainian territory in February 2022, the US has imposed sanctions on at least 3,500 people, businesses, and entities — including Russian President Vladimir Putin himself — according to a report from the US Congressional Research Service. These sanctions prohibit most big Russian banks from transacting in US dollars or with US organisations. In addition, the US has expanded export controls to hurt Russia’s economy.
For decades, sanctions like these by the US have been used as a non-lethal weapon to inflict economic pain on countries, Venezuela and Myanmar being two recent examples. But Russia’s campaign against Ukraine has resulted in a ramping-up of the measures. The US Treasury Department, which enforces sanctions, has no plans to release its chokehold.
“As long as Russia’s invasion continues, we will level sanctions and export controls that undermine the Kremlin’s efforts to stockpile goods and technologies,” said Wally Adeyemo, US Treasury deputy secretary, in an FT op-ed last year. “By raising the stakes for banks supporting sensitive trade with Russia, our coalition is pouring sand into the gears of Russia’s military logistics.”
In February, after the death of Russian opposition leader Alexei Navalny in prison, the Treasury followed through on this threat and added nearly 300 people and organisations to its sanctions list. These new sanctions targeted entities in 11 other countries, including China, Liechtenstein and the United Arab Emirates. In addition, the Treasury sanctioned five investment and venture capital funds that fund Russian technology, plus six fintech companies that provide software for Russian financial institutions.
However, this deluge of sanctions has bankers on edge. Many in the industry feel that, the more sanctions there are, the more bankers are being used as intermediaries to implement them in the financial system.
That carries an increasing financial risk. Settlements with the US Treasury for sanction breaches hit a record high of $1.5bn in 2023, notes Vincent Gaudel, financial crime compliance expert at LexisNexis Risk Solutions. While no civil monetary penalties have yet been levied for violations of restrictions related to Russia’s Ukraine invasion, “it seems only a matter of time before the first cases emerge”, he reckons.
“The message conveyed is unequivocal: entities found violating US sanctions against Russia now face the consequences,” Gaudel warns.
Roberto Gonzalez, partner at law firm Paul Weiss, says that means almost any transaction directly, or indirectly, involving Russia faces a higher risk from a sanctions perspective.
Further US sanctions against Russia are expected to target people or entities outside the country who are nonetheless helping its war, he suggests. These may include “one or more non-US financial institutions that engage in significant defence industry-related transactions involving Russia”.
To make matters worse for bank executives and risk managers, sanctions misconduct can be enforced even if someone does not know that laws have been breached, explains Eric Young, senior managing director, at security consultants Guidepost Solutions. He advises compliance officers at banks to co-operate with their counterparts around the world. “This is no longer a ‘nice to do’ but a must,” he stresses.
Banks should review and refresh their processes to comply with “know your customer” rules, Young says, and ascertain whether beneficial owners are subject to sanctions.
Young points out that sanctions can affect a wide range of operations, from payments to trade finance. They can also create vulnerabilities in banks’ broad ecosystems of vendors, suppliers and other counterparties, he adds.
But it is not only the Ukraine conflict that poses risks of breaching sanctions. Other geopolitical hotspots are drawing sanctions attention, too.
$1.5bnSettlements and enforcements over US sanction breaches in 2023
Several companies in China, for example, have become the target of US 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 US sanctions, he says.
Similarly, the conflict in the Middle East between Iran — including its proxies, Lebanon, Syria and Yemen — and Israel could become another focus of US sanctions activity, says Gonzalez. “We could see a further escalation of significant sanctions targeting Iran and many of its proxies,” he believes.
Financial institutions are also expected to monitor for suspicious activity and potential violations of US export controls. For banks, this may be a new challenge. Gonzalez says it is “an area of law that, historically, financial institutions had not been specifically focused on”.
Other banking activities can leave the institutions open to these geopolitical risks — cryptocurrency operations, for example. As bitcoin and other digital assets gain wider acceptance in the financial system, banks have been expanding their operations in this area. France’s Société Générale, for example, has launched its own stablecoin on a cryptocurrency exchange. But, as Adeyemo warned last month, Russia may be using cryptocurrencies to evade sanctions.
“We’ve seen Russia increasingly turning to alternative payment mechanisms — including the stablecoin Tether — to try to circumvent our sanctions and continue to finance its war machine,” he observed.
Whether through alternative currencies or new geographies, the frequency of US sanctions updates will only increase over the next couple of years, or as long as the Ukraine war continues. They will not be the only measure banks must watch out for, either. Young says there will be “much closer co-ordination of other Nato, Japanese, South Korean and other western sanctions rules, which are similar, but not identical, in scope or approach.”
