The Russian invasion of Ukraine has triggered a pace of sanctions unlike anything we’ve seen before, bringing challenges for financial services firms looking to stay compliant, ComplyAdvantage CEO Charles Delingpole said.
Sanctions target Russia, two separatist pro-Russian regions in Ukraine (Donetsk People’s Republic and Luhansk People’s Republic), Belarus, and people and entities seen as allies to Vladimir Putin. They restrict access to technologies, services that support the military, and luxury goods.
Financial actions have hit Russian banks, with some banned from SWIFT. Officials enacted broad restrictions on those providing investment services and loans to Russians and accepting deposits from Russian people.
Most of the Russians sanctioned are well-known entities with a track record of adverse media, Delingpole said. Billionaire Roman Abramovich has established links to the regime and was once governor of the Chukotka region.
“Most people that get sanctioned, you will know about in advance because they’re very prominent,” Delingpole said. “They’re politically exposed. And there are media [posts] about them. We have all that data on the platform.”
One person close to Putin who had escaped sanctions at the time of writing is his alleged mistress Alina Kabaeva. She recently held a four-day gymnastics event in Moscow, but there was no mention of her relationship with Putin or they have several children together. Despite Kabaeva having spent seven years in the Duma and after her suspension from gymnastics for using a banned substance two decades ago.
In 2008 a paper reported on the Kabaeva/Putin relationship was shut down. Kabaeva is now chair of Russia’s National Media Group.
Any possible sanctions against Kabaeva are being held in reserve, so countries have something to hit Putin with if the war escalates, Delingpole suggested.
What makes these sanctions unique and challenging
What is rare is the combination of the scale, scope, and breadth of the sanctions, Delingpole explained. Thousands of entities have been sanctioned by dozens of countries. Most areas of Russian life have been impacted somehow, including Russian composers and athletes.
The challenge for ComplyAdvantage, and by extension, its clients, is that more sanctions come from multiple countries on most days. The United Kingdom, for one, has changed regulations and laws several times over the past 10 weeks. On the day we spoke, the European Union added another 10 mandates to the pile. Many countries are sanctioning Putin himself via several agencies.
How often should fintechs be checking? Delingpole said the ideal is for checks to automatically run in the background of an ERP or CRM system. A minimum good practice would include checking each time the relevant sanctions lists are changed; and if there is a change in the user’s details. Always include directors, beneficial owners, and third-party payees in the screening.
“We will only return a new watchlist report to the customer where there is a change (such as if) the user has been added or removed from the searched databases,” Delingpole explained. “If there is a change, the customer can be notified via WebHook and then call a new watchlist report via an API endpoint. This reduces the noise of us returning negative results daily across user bases.”
There are several ways to reduce false positives, he added. Always submit complete data, including first and last names, date of birth, and country, so that providers can refine the search. Use Watchlist Standard if adverse media isn’t required, as fewer sources mean fewer matches and false positives.
How are fintechs affected?
Do any of the sanctions impact fintechs that operate in multiple countries or have staff based worldwide? Not really, Delingpole said. After the 2014 annexation of Crimea, some companies flew Russian engineers to Georgia or Ukraine, so they could still work internationally.
In 2022 folks working from Russia cannot get paid because virtually every company has blocked payments to Russia. As for the impact on Ukrainians, coders are now on the front lines and not at their computers.
The impact of sanctions on fintech is twofold, Delingpole said. With 12 million people and entities on the sanctions list, it takes longer to onboard clients. There’s also the cost of hiring companies like ComplyAdvantage.
“Generally, financial services businesses are expected to take a ‘risk-based’ approach (with sanctions checks forming part of a wider sanctions compliance program) – no ‘one size fits all,'” Delingpole said. “However, it’s clear when we look at how often sanctions lists are updated; it’s unlikely to be enough to screen someone on account opening simply.”
Current sanctions will have an effect, but not Putin’s
While the world understandably wants to see countries do more to stop Russia, recent actions will significantly affect its weapons supply chain, Delingpole said. Their drones have Nikon cameras, and their tanks have Bosch engines.
“Those components can no longer be supplied to Russia so often the factories are closing,” Delingpole explained. “Plus, all the payments they want to make they can’t meet because the light switch is closed. The idea is that the Russian supply chain for manufacturing weapons seizes up.”
While Russia has imposed sanctions on the West, Delingpole said they have no impact.
“No one holds assets in Russian banks. Nobody cares about going to Russia, and there isn’t a Russian finance industry. So the reciprocal sanctions have no impact, whereas the Western sanctions mean that Russians can’t go to Paris and go London. They’ve got billions frozen.”
Nobody knows the Ruble they’ve seen
Once officials started freezing central bank assets, Russia began to demand payments in roubles to avoid sanctions, Delingpole explained. It diminishes the power of boycotts. There is no industry after oil, gas, potassium, and fertilizer, so Russian desperately needs the funds from selling these resources.
“They have a space industry, but that’s going to be dead now,” Delingpole said. “Most of their weapons are sold at cost to their army, but then it’s sold at much higher margins to other parties, most of whom will no longer buy Russian weapons. Give it five years, and I think the Russian economy will be destroyed, right? It’s much more significant than Iran, Venezuela, or North Korea. So it’s a large North Korea.
“In reality, the only thing that matters is oil and gas exports, which haven’t been blocked. And that’s how Russia can carry on making foreign currency payments. It’s all well and good sanctioning caviar and vodka, but it’s tiny. Germans stop buying gas from Russia, and that hasn’t happened.”
Considerations when choosing a compliance services provider
Choose a provider with configurable parameters, as different companies may have different needs. Carefully consider what level of tolerance of non-matches you are willing to accept.
“On a scale between zero and 10, where zero is a 100% match, it is risky (to choose zero) since a spelling mistake or different country given would mean no match result would be yielded,” Delingpole said. “Some customers may be happy with two, some may want to cast the net wider at five – it will lead to more false positives but reduce the risk of missing someone.”
What is the ideal combination of automated and manual work? It depends on how many false positives your preferred tolerance level generates. Those false positives add manual work as companies cannot risk adding sanctioned individuals. False positives lead to manual reviews by teams, and that is pricey.
When choosing a vendor, consider the number of sources they have access to and how often they update them, Delingpole advised. Determine uptime, customer support, and overall reliability. How do the companies under consideration gather their information?
“ComplyAdvantage is doing this in a smart, automated, ML way,” Delingpole said. “Older legacy companies are doing this manually with hundreds of people trundling the web.”
The final factors are system configurability and custom search capability, Delingpole said.
“We are working to empower customers to configure custom searches and roll them out repeatedly to different segments of their databases repeatedly,” he concluded.
Tony Zerucha is a long-time contributor in the fintech and alt-fi spaces. A two-time LendIt Journalist of the Year nominee and winner in 2018, Tony has written more than 2,000 original articles on the blockchain, peer-to-peer lending, crowdfunding, and emerging technologies over the past seven years. He has hosted panels at LendIt, the CfPA Summit, and DECENT’s Unchained, a blockchain exposition in Hong Kong.