Russia’s invasion of Ukraine on 24th February 2022 prompted a swift and severe response from the international community and triggered a range of economic sanctions unprecedented in their scope and severity. In coordination with the UK, the US and Canada, the EU joined Western economic powers in imposing sanctions against Russia designed to punish President Vladimir Putin’s regime, and degrade Russia’s ability to bring military power to bear against its neighbour.
The EU’s sanctions on Russia are intended to “cripple the Kremlin’s ability to finance the war, impose clear economic and political costs on Russia’s political elite, and diminish its economic base”. In addition to Russia’s economy, the EU is also targeting Russia’s transport, trade, and energy sectors in what foreign policy chief, Josep Borrell, has called “the harshest package of sanctions we have ever implemented.”
The EU issued the first round of sanctions following Russia’s initial incursion into Ukraine, but has since implemented a second round of sanctions that target the Russian economy more broadly, along with specific measures against a list of politicians and military commanders.
What are the EU’s Russia Sanctions?
Existing Sanctions
The EU imposed sanctions on Russia in 2014, following the annexation of Crimea. Sanctions were also implemented in response to the Russian government’s ongoing interference in Western democratic elections and its oppression of political dissidents and journalists – such as the poisoning and imprisonment of Alexei Navalny. The EU’s sanction regime targets individuals and entities and includes asset freezes, trade prohibitions, import and export bans, and travel bans.
The first round of 2022 sanctions: 23rd February 2022
The first round of the EU’s 2022 sanctions against Russia were announced on 23rd of February, in response to Russia’s recognition of the ‘independence’ of the Donetsk and Luhansk regions of Ukraine and subsequent troop incursions into those areas before the large-scale invasion began on 24th February. Josep Borrel characterised Russia’s recognition of Donetsk and Luhansk as an “illegal and unacceptable” violation of international law.
The sanctions entailed the following measures and restrictions:
- Asset freezes and travel bans against the 351 members of the Russian State Duma (the lower house of Russia’s parliament) who voted to recognise the ‘independence’ of Donetsk and Luhansk.
- Asset freezes and travel bans against 27 Russian individuals and entities deemed to have ‘contributed to the undermining or threatening of the territorial integrity, sovereignty, and independence of Ukraine’. The targets of the sanctions include:
- PSB Bank
- VEB Bank
- Bank Rossiya
- Internet Research Agency
- Sergei Shoigu, Russia’s Defence Minister
- Igor Shuvalov, Head of VEB Bank
- Maria Zaharova, Russian Foreign Ministry spokeswoman
- Margarita Simonyan, head of the RT TV news channel
- Prohibitions on Russian banks and state-owned entities accessing the EU’s financial markets and raising funds in the EU financial system.
- Further targeted sanctions prohibiting business relationships with individuals and entities in the Donetsk and Luhansk regions.
The second round of 2022 sanctions: 25th February, 2022
Following the first round of sanctions, and in response to Russia’s ‘unprovoked and unjustified’ escalation to a full-scale invasion, EU member-states implemented a second round of sanctions on 25th February, including sanctions targeting President Putin and Russian Minister of Foreign Affairs, Sergey Lavrov.
The second round of sanctions targets the following areas of the Russian economy and social infrastructure with a range of measures:
Finance
- Expanded measures to further cut Russian access to European capital markets.
- Prohibitions on Russian state-owned entities using EU trading venues.
- Prohibitions on Russian nationals and residents depositing funds into EU financial institutions, and on Russian nationals holding accounts with EU financial institutions.
- Prohibitions on the sale of euro-denominated securities to Russians.
- A ban on transactions with the Russian Central Bank.
Energy
- Prohibitions on the ‘sale, supply, transfer or export’ of goods and technologies, and on the provision of services, relating to oil refining to Russia.
Transport
- A ban on the export of goods and technology for use in the Russian aviation and space industries.
- A ban on the provision of insurance and maintenance services relating to aviation and space technology to Russia.
Technology
- Restrictions on the export of dual-use goods and technology to Russia, and on the export of goods and technology that may be used to enhance Russia’s defence and security sectors.
Visa Policy
- Russian diplomats and officials will no longer be able to benefit from visas that enable privileged access to the EU. The measure does not affect ordinary Russian citizens.
The EU has also frozen the assets of President Putin and the Minister of Foreign Affairs, Sergey Lavrov.
The EU’s sanctions measures are expected to affect 70% of the Russian banking market – in particular companies involved in defence – and prevent Russian politicians and oligarchs from hiding their money in European safe havens. They are also expected to increase Russian borrowing costs and inflation, and degrade Russia’s industrial sector.
Switzerland’s Sanctions on Russia
Although it is not an EU member-state, and traditionally remains neutral in issues relating to global conflicts, Switzerland has joined the EU and the wider international community in levelling sanctions against Russia. Switzerland’s government has stated that the sanctions do not violate the country’s long-held neutrality principle because they have been implemented as a way to address Russia’s violation of international law.
Switzerland’s Russia sanctions were implemented under the ‘Ordinance on Measures in connection with the situation in the Ukraine’ on 25th February 2022, and include the following measures:
- Asset freezes on designated Russian individuals and entities.
- A ban on entering business relationships with designated Russian individuals and entities.
- Asset freezes against Russian President Vladimir Putin, Prime Minister Mikhail Mishustin, and Foreign Minister Sergey Lavrov.
- A ban on imports and exports to the Ukrainian regions of Donetsk and Luhansk.
- Closure of Swiss airspace to all flights from Russia.
How to Comply with the EU’s Russia Sanctions
With Russia’s invasion of Ukraine ongoing, the sanctions risk landscape is likely to remain fluid for the foreseeable future. The complexity of the EU’s Russia sanctions programme is exacerbated by the capability of Russian oligarchs to hide money around Europe, and conceal their footprints with corporate structures and shell companies.
With that in mind, it is essential to have a balanced approach to sanctions and watchlist management that offers a holistic perspective on your company’s risks. Our risk management solution includes next generation name-matching software in order to maximise true matches and minimise false positives – even when matching Cyrillic, Asian and other character sets with Western or Latin names and vice versa.
One of the best ways to stay ahead of evolving sanctions compliance obligations, is to implement effective adverse media screening. Ripjar’s Adverse Media screening solution adds another dimension to your risk management capabilities, deploying continuous monitoring and identification measures in order to detect high risk customer names as soon as they are featured in news stories. Integrating machine learning data classification, our data processing hub can read articles in 21 languages, across a wide range of sources, and is designed to identify pertinent risk so that analysts can decide if further action must be taken.
Contact Us to learn more about risk screening
Although they are not often featured in the history we learn in school, sanctions are a common feature of modern warfare as they can provide an effective alternative to martial tactics. In response to the Russian invasion of Ukraine on 24th February 2022, Western nations unveiled significant new economic sanctions against Russia.
In the United States, President Biden vowed to act in conjunction with other G7 nations to impose “devastating packages of sanctions”, whilst Prime Minister Boris Johnson announced that the UK government would be imposing “the largest and most severe package of economic sanctions that Russia has ever seen.” Meanwhile, the EU also moved to sanction Russia: following a summit of EU leaders, Belgian Prime Minister Alexander De Croo described a wide-ranging package of sanctions that would “hurt the Russian economy in its heart”.
Given the severity of the new Russia sanctions and the speed at which they have been deployed, it is crucial that banks and other financial institutions move quickly to understand their new compliance responsibilities and adjust their sanctions screening solutions to reflect the new risk environment.
US Sanctions on Russia
The United States has imposed a sanctions programme against Russia since its invasion of Ukraine in 2014, and in response to Russian efforts to interfere in Western elections via cyber-warfare. The US has also sanctioned Russia over human rights violations against journalists and opposition political leaders.
In response to Russia’s 2022 invasion of Ukraine, the US introduced the following new economic measures:
- Asset freezes against four major Russian banks including the State Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank (VEB), and against Promsvyazbank Public Joint Stock Company (PSB) – along with 42 of those banks’ subsidiary organisations. Both institutions are deemed ‘crucial to financing the Russian defence industry’ and hold combined assets worth tens of billions of dollars.
- Targeted sanctions against Russian elites and families close to Russian President Vladimir Putin, including:
- Aleksandr Vasilievich Bortnikov, director of the Russian Federal Security Service (FSB)
- Denis Aleksandrovich Bortnikov, deputy president of Russian state-owned VTB Bank
- Petr Mikhailovich Fradkov, chairman of PSB
- Vladimir Sergeevich Kiriyenko, CEO of VK Group, the parent company of Russia’s top social media platform, VKontakte
- Sergei Vladilenovich Kiriyenko, First Deputy Chief of Staff of the Presidential Office
- A range of restrictions on Russia’s sovereign debt, designed to prevent the Russian government from raising money to fund further actions in Ukraine.
- A ban on the export of goods and technologies to Russia that could be used to facilitate its hostile actions towards Ukraine.
UK Sanctions on Russia
The UK imposes autonomous sanctions on Russia under the authority of the Russia (Sanctions) (EU Exit) Regulations 2019. Like the US, the UK’s sanctions program was implemented in response to the 2014 invasion, Russian attempts to destabilise Western democracies, and the Russian government’s ongoing human rights violations against journalists and political dissidents.
On 24th February 2022, the UK’s Foreign Secretary, Liz Truss, announced ‘comprehensive’ sanctions against Russia in response to the invasion of Ukraine. The sanctions affect Russian elites, companies and banks, and include:
- Asset freezes for Russian banks operating in the UK. The UK government characterised the measure as ‘totally shutting off’ the banking system to Russian institutions.
- Prohibitions on Russian state-owned and private companies raising funds or borrowing through UK markets.
- Punitive restrictions on exports to and the trade with Russian high-technology and military industries.
- A UK airspace ban on Aeroflot, Russia’s national airline.
- An ongoing effort to exclude Russia from the SWIFT financial system.
- Targeted sanctions, including travel bans and asset freezes, against over 100 companies and individuals at the heart of Vladimir Putin’s regime. These include:
- Kirill Shamalov, Vladimir Putin’s son-in-law
- Petr Mikhailovich Fradkov, chairman of PSB
- Rostec, Russia’s largest defence company
- Tactical Missile Corporation, Russia’s largest missile supplier
- Uralvagonzavod, a Russian tank manufacturer
- A £50,000 limit on Russians making deposits in UK banks.
The UK has said that its Russia sanctions programme will be extended to targets in Belarus in response to their involvement in the invasion of Ukraine.
EU Sanctions on Russia
The EU has kept pace with the US and the UK in imposing sanctions on Russia in response to the 2014 invasion, ongoing political interference in Western democracies, and to human rights violations. On 23rd February 2022, the EU agreed a new package of Russia sanctions in response to the Ukraine invasion. The package includes the following measures:
- Sanctions against all 351 members of Russia’s State Duma (the lower house of the Russian parliament). The measure specifically targets the politicians that voted in favour of VladimirPutin’s recognition of the ‘independence’ of Ukraine’s Donetsk and Luhansk regions.
- Targeted sanctions, including asset freezes and travel bans, against 27 Russian individuals and entities that the EU has identified as having ‘contributed to the undermining or threatening of the territorial integrity, sovereignty and independence of Ukraine’. Those individuals and entities include:
- PSB Bank
- VEB Bank
- Bank Rossiya
- Internet Research Agency
- Sergei Shoigu, Russia’s Defence Minister
- Igor Shuvalov, Head of VEB Bank
- Maria Zaharova, Russian Foreign Ministry spokeswoman
- Margarita Simonyan, head of the RT TV news channel
- Restrictions on Russian banks and state-owned entities accessing and raising funds in the EU’s financial system.
- Restrictions on business relationships with entities in the Russia-controlled Donetsk and Luhansk regions of Ukraine.
Canada Sanctions on Russia
Canada has joined other Western nations in enhancing its existing Russia sanctions regime, which are imposed under the authority of the Special Economic Measures Act (SEMA), the Russia Regulations, and the Ukraine Regulations. The new sanctions, announced on 24th February 2022, add the following measures and restrictions to the existing regime:
- Targeted sanctions against 58 Russian individuals and entities. The targets include politicians, oligarchs and their family members, and several Russian financial institutions.
- Prohibitions against any business relationships with VEB Bank and PSB Bank.
- Sanctions against all 351 members of the Russian State Duma that voted in favour of recognising the ‘independence’ of the Donetsk and Luhansk regions.
- Restrictions on all financial dealings with persons in the Donetsk and Luhansk regions.
- Restrictions on persons in Canada purchasing Russian sovereign debt.
Future Sanctions
The political and military situation in Ukraine is extremely volatile and it is likely that the sanctions landscape will remain fluid for some time. Banks and financial institutions should prepare to deploy a high level of AML/CFT scrutiny for Russian customers and transactions that involve Russian and Ukrainian counterparts. This means implementing suitable sanctions screening measures, and consulting the relevant international sanctions lists regularly.
Difficulty in Administering Sanctions
The rapid announcement by western governments is impressive, but the implementation will be extremely complex. Russian individuals and companies have been participating heavily in Europe – and particularly in the UK. Before the invasion, Russians had proved adept at using corporate structures and shell companies to obscure ownership. Governments will try to unpick the complexities which will likely ultimately lead to stricter controls on the way companies are created. Banks and others trading internationally should prepare for a rough ride as the situation unfolds.
How can Ripjar help?
It is essential to have a balanced sanctions and watchlist management approach which guarantees 100% adherence to critical global sanctions lists while leveraging other supplementary lists to get a holistic view of risk. Ripjar’s next generation name matching approach has been developed to maximise true matches and minimising false positives – even when that involves matching Cyrillic, Asian and other character sets with Western or Latin names and vice versa.
With the rapidly evolving risk picture, Ripjar’s Adverse Media screening adds another dimension by highlighting potentially exposed customers as soon as they hit the news, with continuous monitoring and identification of risk. Using machine learning data classification, the Ripjar data processing hub can read articles in 21+ languages and a wide range of sources, and identify pertinent risk to enable analysts to review where further action must be taken.
To give yourself the best opportunity to understand and mitigate risks early and in depth, speak to Ripjar about how advanced technology can build a significant commercial advantage.
Sanctions provide governments and international organizations with ways to achieve foreign policy objectives and to punish and prevent violations of international law, including human rights abuses. An important tool in the fight against global financial crime, sanctions measures may target entire countries, or groups and individuals, and involve a range of financial prohibitions and restrictions – which firms must screen against to ensure regulatory compliance.
The sanctions screening process is a significant compliance challenge and should be an anti-money laundering (AML) and counter-financing of terrorism (CFT) priority. Targets may be designated on sanctions lists for a variety of reasons that generally reflect their government’s involvement (or their personal involvement) in international criminal activity such as terrorism, weapons proliferation, drug trafficking, cybercrime, or human rights abuse. The financial restrictions that sanctions impose on their targets include:
- Trade embargoes
- Trade prohibitions on certain products or industries
- Investment prohibitions
- Asset freezes
- Travel bans
Firms that fail to comply with sanctions regulations face significant penalties, including fines and even prison sentences – along with the reputational damage that comes with doing business with sanctions targets and being publicly exposed for contravening regulations. With those risks in mind, it is important that firms implement an effective sanctions screening solution to ensure that they meet their regulatory obligations and do not wittingly or unwittingly help criminals break international law.
What is a sanctions list?
While governments devise and implement sanctions programs via the legislative process, sanctions measures are enforced by domestic authorities which add the names of designated targets to sanctions lists and watch lists. In the United States, for example, sanctions lists are maintained and enforced by the Office of Foreign Assets Control (OFAC) and in the United Kingdom, by the Office of Financial Sanctions Implementation (OFSI). Sanctions lists are updated regularly by their controlling authorities and are generally available online.
In order to comply with sanctions regulations, obligated entities such as banks and financial institutions must screen their customers against the relevant sanctions lists – and take appropriate action if they find a match. Sanctions lists may be organized by target countries (or target individuals), such as the US’ Cuba Sanctions, Belarus Sanctions, or Chinese Military Companies Sanctions, or, alternatively, by the nature of sanctionable offences, such as the US’ Counter Terrorism Sanctions or Counter Narcotics Trafficking Sanctions.
Sanctions screening challenges
The sanctions screening process requires obligated entities to process vast amounts of customer and transaction data and take into account a range of relevant factors such as geographic location, political status, beneficial company ownership, and foreign naming conventions. Firms must implement a screening solution that captures the relevant data efficiently without generating an overbearing compliance burden through false positive alerts, and without searching so narrowly that they miss crucial risk liabilities.
Some of the key challenges of sanctions screening include:
Sanctions updates: Geopolitical events mean that the sanctions landscape changes constantly as governments add new names to sanctions lists and withdraw old ones. In 2021, for example, US, UK, Canada, and EU sanctions on China, prompted a range of retaliatory sanctions by the Chinese government, complicating the sanctions landscape significantly for firms within the relevant jurisdictions. Firms must keep pace with updates to sanctions lists by ensuring they are conducting continuous automated searches of the most recent versions of those documents.
Jurisdictional obligations: In any given jurisdiction, firms must manage a complicated set of sanctions compliance obligations often relating to numerous countries, organizations, and individuals. In the US, for example, firms must screen against OFAC’s Specially Designated Nationals (SDN) List, the Consolidated Sanctions List, and a number of additional sanctions lists. The most efficient screening solutions should ensure that firms screen against the lists relevant to their jurisdictional compliance regulations, and apply the relevant financial restrictions to the targets.
Policy and procedure: Given the complexity of sanctions regulations, it is crucial that firms set out clear internal policies and procedures for their screening process. Siloed data, poor communication channels, and unsuitable search software may contribute to screening inefficiencies, regulatory blindspots, and, ultimately, poor compliance performance. Accordingly, firms should review the effectiveness of their sanctions screening process regularly, performing stress tests, and audits to identify and address weaknesses.
Naming conventions: Many foreign language systems use different naming conventions that make sanctions name searches more challenging. Some Asian cultures, for example, reverse the first-name, surname convention used in Western culture, while transcriptions of Arabic names into English may involve significant spelling variation. Similarly, some names may be spelled with non-Latinate characters, using, for example, the Cyrillic, Mandarin, or Arabic alphabets. To account for foreign naming conventions, sanctions screening solutions should integrate sophisticated text analytics and transliteration tools calibrated to an organization’s risk priorities.
Sanctions best practice
Following Financial Action Task Force (FATF) guidance, firms should implement a risk-based approach to sanctions compliance and deploy compliance measures commensurate with the risk that individual customers present. Effective risk-based sanctions screening solutions are built on the Know Your Customer (KYC) process: organizations must ensure they know who their customers are, and what kind of transactions they are involved in, in order to build accurate risk profiles and to ensure sanctions compliance measures are applied correctly.
With that in mind, firms should consider deploying the following AML/CFT measures and controls to enhance their sanctions compliance performance:
Customer identification: The accuracy of the customer data that firms collect will have a significant effect on the efficiency of the sanctions screening process. Insufficient or inaccurate data will generate larger numbers of false positive alerts, over-burdening the compliance solutions and undermining customer experiences. With that in mind, it is vital that firms verify the identities of their customers prior to sanctions screening by performing suitable customer due diligence, obtaining the relevant identifying documents such as passports, driving licenses, birth certificates, and company incorporation information. During the due diligence process, firms should pay particular attention to customer names, taking into account the use of common prefixes, secondary names, suffixes and the use of AKA (‘also known as’) naming conventions.
Beneficial ownership: The use of shell companies to disguise ownership of assets and evade sanctions restrictions is a well-publicized financial crime. Recent investigations, including the Panama Papers and the Paradise Papers, have revealed numerous examples of sanctions targets concealing their identities behind foreign corporate infrastructure. The sanctions risk posed by shell companies means that firms should seek to establish beneficial ownership of any companies that they do business with, applying the same AML/CFT scrutiny to corporate customer entities as is applied to individual customers.
Technology: As sanctions list change and new regulations emerge, the technology that firms use to screen their customers becomes more important. Most sanctions regimes require firms to collect vast amounts of data – and then analyze and process that data within strict time periods. Given the potential compliance burden, sanctions technology platforms should be a priority for all compliance solutions. In addition to facilitating the flow of high volumes of data, sanctions software can help firms build out their risk-appetite as part of a risk-based response, using features like fuzzy logic and other name matching capabilities to ensure they are capturing risk liabilities without overscreening.
Sanctions data: Unstructured sanctions data elements that are pulled from an array of disparate sources will take longer to process and analyze, and increase the compliance burden that firms face. Accordingly, the sources of sanctions data should be a compliance priority: firms should consider the quality and quantity of data that a source provides, and how often that data is updated. Firms such as Dow Jones Risk and Compliance provide high quality data that firms and regulators trust globally. Similarly, firms should seek to use consolidated lists that compile all sanctions applicable under a certain regime in order to enhance the efficiency of their screening process.
Transaction monitoring: Firms should constantly monitor their customers for indications that they are transacting with sanctions targets. This means being vigilant for certain red flag financial behaviours, including unusual transaction patterns and transactions into and out of high-risk AML/CFT jurisdictions.
Politically exposed persons: Elected officials and government employees pose a much higher risk of being sanctions targets than other types of customers. Accordingly, firms must take steps to establish whether customers are politically exposed persons (PEPs) and adjust their compliance response accordingly. The PEP screening process should be performed throughout business relationships to capture changes in customer status.
Adverse media: News stories may reveal customers’ designation (or potential designation) as sanctions targets before that information is officially confirmed. With that in mind, firms should prioritize adverse media screening as part of their sanctions risk management solution. Adverse media screening should involve searches of a range of relevant sources, spanning foreign screen, print, and online news outlets from the relevant locations. While firms may be vigilant for information pertaining directly to customer sanctions designations, adverse media may also capture peripheral activities that may increase sanctions compliance risk in the future.
WANT TO LEARN HOW RIPJAR CAN HELP WITH SANCTIONS & WATCHLISTS SCREENING?
As companies engage with counterparties – namely customers, vendors or other parts of their supply chain – it is essential that they understand the risk associated with doing business with all of those entities. That is difficult enough when the counterparties are nearby and really challenging when they are further afield.
At the heart of KYC (Know Your Customer – or KYV for vendors), is a check to see if your customer appears on a public watchlists or sanctions lists. The lists are published by organisations such as the UN and specific governments. The most well known publisher is the US Treasury’s Office of Foreign Assets Control or OFAC. Their sanctions list must be observed by all businesses operating in the US.
In a simpler world, that would be all there was to it, but the requirement is actually more complex. OFAC’s 50 Percent Rule states that “property and interests in property of entities directly or indirectly owned 50 percent or more in the aggregate by one or more blocked persons are considered blocked”. That is to say that sometimes counterparties may not appear on watchlists and sanctions lists but may be majority owned (individually, indirectly or in the aggregate) by sanctioned actors presenting a hidden risk.
We are delighted to announce that we are partnering with Kharon to close the gap. Kharon’s premium 50 Plus data adds another important dimension to the fight against financial crime and desire to protect against reputational risk.
Kharon conducts complex, multilingual investigations for entities that appear on the sanctions list – including their subsidiaries as far down as the ownership chain extends – as well as state owned enterprises in sanctioned jurisdictions. It includes thousands of entities and maritime vessels registered in more than 100 jurisdictions.
If you’d like to know more about how Kharon data can enhance your KYC process, please contact us for a demo.