According to Max Heywood, head of public sector at Elucidate, “announcing sanctions is one thing, ensuring that banks are putting them in place effectively is another challenge altogether.”
He believes the situation in Russia should trigger a global reset in the way banks manage financial crime, given how widespread the issue is. He also states that any new approach should start with Know Your Data (KYD) rather than the customary Know Your Customer (KYC), because of the growing sophistication of sanction busters.
For evidence, he cites multiple instances in the recent past when the assets and transactions of individuals and businesses slipped through the sanctions net.
Now though, the stakes are much higher because of the mounting array of penalties for failure in applying sanctions. For instance, the UK government is hurrying along the introduction of laws to tackle economic crime and help the National Crime Agency prevent foreign owners from laundering their money through UK property, as they have done in the past.
Organisations such as the UK’s Association for Corporate Treasurers (ACT) echo Heywood’s warnings, with the organisation reminding treasurers of their many obligations.
“Any company facing a direct or indirect material impact from the invasion will need to consider their approach to the crisis,” the ACT warned, citing the responsibility of treasurers to protect the assets of their companies and mitigate any financial risks of doing business.
“Along with other parts of the organisation, the treasurer will need to consider a number of short- and longer-term risks and potential mitigants.”
The European Securities and Markets Authority (ESMA), was also quick to issue advice. In a preliminary reaction to the invasion, ESMA recommended that issuers should disclose as soon as possible any inside information concerning the impacts of the crisis in Ukraine on their fundamentals, prospects and financial situation. This applies under the Market Abuse Regulation.
And on the subject of financial reporting, ESMA reminded treasurers they must be as transparent as possible on how the crisis might affect their companies’ business activities. This should cover “exposures to the affected markets, supply chains, financial situation and economic performance in their 2021 year-end financial report”.
KYC to KYD
Clearly, all this will require a new level of risk management in the treasury function which should, advises Heywood, be based on KYD.
“Banks will need to have sophisticated detection processes that go beyond manual monitoring of transactions, towards a more comprehensive approach that can analyse what in some cases will involve millions of data points,” says Heywood
However, some banks are more exposed than others.
“Every bank has a different exposure level to new risks, such as sanctions,” he says. “In such instances, it might not be enough to flag those transactions attributed to sanctioned individuals and firms. This is especially true when attempting to look back through historical transactions across the entire client base.”
Current systems are increasingly unable to cope with the complexity of sanctions, he says.
“Considering the extensive use of shell companies and other techniques that can disguise the identities of the real parties to a transaction, manual techniques and standard transaction monitoring methods are highly likely to fall short.”
Looking further ahead, even a cursory glance at the ACT’s many recommendations show how complex compliance with sanctions will become.
In just the one area of trade finance and credit insurance, for example, the trade body underlines the importance of undertaking an inventory of any goods that have been shipped. “If they have not already been shipped (either from or to Russia), can the deal be cancelled?”
And on the issue of credit insurance, the ACT says treasurers should talk with insurers “to assess what your rights and obligations are” in the case of targeted companies. Meanwhile on payments, treasurers should make sure that third-party providers including banks, even long-standing ones, are running them through fully complying channels.
For good measure, the ACT warns of the increased risk of cyber-attacks and treasurers’ obligations to work with the IT department to ensure the company can withstand them. Already fraught, the pressure on treasurers is certain to grow.
“This situation will become more complex as multinational companies shed long-term relationships and joint ventures with Russian companies and individuals,” the ACT predicts, depending ultimately on how long sanctions last.
In mid-March many observers saw them being in place for years if Russia is declared a commercial pariah and blocked from normal trading relationships.