As Russia’s Financial Sector Shrinks, So Too Do Its Compliance Teams
Contributed by Jessica Wilson on 06 May 2015
Originally published by Irene Madongo on ACAMS moneylaundering.com - the world's leading authority for keeping on top of money laundering, sanctions, financial crime and compliance news.
Away from Moscow, the EU and U.S. sanctions have done more than simply hobble the ability of Russian banks to obtain credit and correspondent accounts. For some institutions in London, the restrictions have resulted in tight constraints on anti-money laundering compliance efforts.
Under a series of sanctions imposed last year in retaliation to Russia’s invasion of Ukraine in February 2014, financial institutions with operations in Europe and the United States have frozen the assets of individuals and businesses linked to Russian President Vladimir Putin and restricted lines of credit offered to companies in the federation’s energy, defense and financial sectors.
To date, the European Union has blacklisted 151 individuals and 37 entities, including the largest shareholders of Bank Rossiya, and limited access to capital markets and loans for Sberbank, VTB Bank, Rosselkhozbank, Vnesheconombank and Gazprombank.
At a recent industry event in London, one employee at a Russia-based bank said that the consequent drop in business has resulted in layoffs, including within the institution’s compliance department. The bank’s executives ordered the layoffs despite a climate of heightened regulatory scrutiny, the person said.
The sanctions have had a “very major impact” on financial activity in Russia and Eastern Europe, and Russian banks have been hit particularly hard, according to Tom Senchukov, of London-based based recruiter Pure Search Financial Services.
“Banks have been downsizing. As a result, a number of people across the risk sector and within control functions have been exited,” Senchukov said.
"Russian banks in the U.K. have seen few new clients and a sharp decline in know-your-customer duties and transactional monitoring work".
“Likewise, the advisory function to transactional desks or trading desks won’t be required because there is simply no activity and trading taking place. They are winding down positions. However, as the compliance officer is invariably the last person who switches the lights off, there will be at least somebody left there.”
Because EU sanctions bar the issuance of long-term credit to certain Russian companies, loan officers at the banks have found that some of their work is now tantamount to committing a crime, according to Oleg Kolotilov, a partner at Moscow-based KK&P law firm, who also confirmed the general decline in compliance staff.
How long Russia’s economy, and consequently its banks, will suffer for the invasion of Ukraine remains unclear.
On Monday, German Chancellor Angela Merkel said that EU member-states would likely renew sanctions set to expire in July given Russia’s lack of compliance with the Minsk peace accord, according to Bloomberg.
The comments follow the disclosure in April that the Russian economy shrank by two percent in the first three months of the year, a decline largely attributable to the financial restrictions but due in part to a drop in oil prices.
British regulators have at the same time signaled growing compliance expectations. Earlier this year, lawmakers finalized plans to hold senior bank managers and other designated parties accountable for the compliance failings at their institutions, and extended a modified version of the regime to foreign banks with branches in the United Kingdom.
In November, the Financial Conduct Authority levied a total $1.7 billion in fines against Citibank, HSBC Bank, JPMorgan Chase Bank, the Royal Bank of Scotland and UBS AG for violations of rules on foreign exchange trading.
While the sanctions have not stopped Russian investment banks from trading in London, they have given international financial institutions pause, according to Moscow-based Dmitry Dmitriev, Global Head of Research at VTB Capital.
“These counterparties are often too careful when carrying out transactions and hence unwilling to take this kind of risk and prefer to be on the safe side,” he said.
Reducing costs as revenue declines is an understandable decision, according to Shaul Brazil, a partner at London-based BCL Burton Copeland.
“It would however certainly be difficult if the decision were such that it would have an impact on its ability to properly ensure that its regulatory obligations were being met,” said Brazil.
The Russian Embassy in London did not respond to inquiries by press time.