Sanctions 101: How banks can navigate SWIFT and export bans


By Terry Monteith

JThe agreement between the United States, United Kingdom and European Union to withdraw certain Russian banks from the Society for Worldwide Interbank Financial Telecommunication was seen as part of a broader response strategy soon after the Russian forces began the invasion of Ukraine. Based in Belgium, SWIFT connects more than 11,000 financial institutions operating in more than 200 countries and processes on average more than 45 million messages per day in 2022, including orders and confirmations of payments, transactions and foreign exchange.

The sanctions implemented effectively prohibit Russian financial institutions from participating in global financial transactions. In an interview with NPR in January, Alexandra Vacroux, executive director of the Davis Center for Russian and Eurasian Studies at Harvard University, described the country’s separation from SWIFT as a “nuclear option” that could have far-reaching effects. . Just before the delisting, French Finance Minister Bruno Le Maire echoed that sentiment, calling the measure a “financial nuclear weapon”.

The White House issued a statement saying, in part: “We are committed to ensuring that certain Russian banks are removed from the SWIFT messaging system. This will ensure that these banks are disconnected from the international financial system and will harm their ability to operate globally.

The keyword there is “selected”, since the list is limited to seven banks (Bank Otkritie, Novikombank, Promsvyazbank or PSB, Bank Rossiya, Sovcombank, Vnesheconombank or VEB and VTB Bank). Sberbank and Gazprombank, two of Russia’s largest banks by assets, are notably absent. The selective ban mainly boils down to Europe’s dependence on Russian energy and fears that a total ban could create catastrophic upheavals in global energy markets.

Russia was one of the biggest users of SWIFT before the partial ban, with more than 300 Russian banks using the system as their primary method of domestic and international banking communication. The removal of SWIFT means that Russian banks cannot make or receive payments from foreign financial institutions anywhere in the world. Normal banking is no longer a possibility at a fundamental level for these institutions.

What do these latest regulatory developments mean for banks and payment processors globally, and how can technology support compliance efforts? Determining the long-term impact is complicated.

Are there viable circumvention methods for Russia?

Russia could switch to its alternative financial communications network, the Financial Message Transfer System, created after the country’s forces annexed Crimea in 2014 and was previously threatened with disconnection from the SWIFT system, or the Moscow cross-border interbank payment system. Even if Russia takes either path, financial experts say they are inadequate and not real individual alternatives.

SPFS has only 400 participating banks from 23 countries, including Turkey, Uzbekistan and Kazakhstan, operates only during weekday working hours and includes size limitations for its messages, making it unable to handle transactions. complex. China may be the second largest economy in the world, but CIPS only settles payments in Chinese yuan and relies in part on the SWIFT network for its operations, which means that transactions would still potentially be a violation of SWIFT’s partial ban.

Russians are crypto-savvy, so they could follow the lead of other countries like Iran and North Korea in using crypto or digital assets to potentially circumvent sanctions without having to follow strict knowledge rules. of your customer. But the balance between cryptocurrency activity on the blockchain and transactions processed by traditional financial institutions is incredibly uneven. There is not enough viable liquidity to support Russia in this way.

Monitoring and surveillance activities ensure that digital banking institutions will not help Russia or suffer similar negative consequences. Any increase in transactions on any of these routes would likely attract the attention of international regulators to their detriment as well.

How banks can help businesses

With so much uncertainty surrounding the international conflict, businesses need to have the right processes and tools in place to successfully navigate ever-changing developments and stay compliant. Whether revamping internal corporate protocols or external communications with merchants, financial institutions will need to embrace innovation to keep up with these ever-changing developments.

At the very least, businesses should work with payment providers that block sanctioned banks and regions and should seek compliance guidance to block transactions if they were transacting in sanctioned regions. Visa, Mastercard and American Express have taken action, suspending operations and blocking transactions for cards issued by Russian and foreign banks making purchases inside and outside Russia. The latter company has also suspended its operations in Belarus.

Although there is no full trade embargo with Russia, companies based in the US, EU and UK should be aware of specific sanctions by product type, targeting products with advanced technologies. Specifically, new export control restrictions are in place.

The Department of Commerce’s Bureau of Industry and Security has listed items in its Export Administration Regulations that require a license to be exported to Russia, unless an exception or special provision is made. Items run the gamut to include electronics, telecommunications components, information security, sensors and lasers, navigation and avionics accessories, aerospace and propulsion systems, and more. The Council of the European Union and the United Kingdom have also published their specific regulations for licensees.

The idea behind these export bans is to deny Russia’s ability to import advanced technologies in the defense, aviation and marine sectors. Over time, this secondary tactical move will have a significant economic impact on the Russian economy and military capabilities.

How can global payment networks and banks use technology to adapt?

Global banks should be experienced with sanctions, and with the right technology partners, sanctioned banks or regions will be automatically blocked for customers for whom payments are provided. Compliance teams and risk managers should already have thought proactively about potential exposure to Russian financial entanglements and what could be done to protect their business.

Companies today need to ensure that their vendors have flexible and robust AML transaction and compliance monitoring, sanctions lists, and politically exposed person screening. Refine rules and business models and leverage partnerships with industry-wide visibility to understand current best practices. This will be very important with frequent changes and the prioritization of best practices that need to be implemented immediately.

With the conflict continuing, Moscow could probably look for alternatives while already preparing for prolonged sanctions. “Step back with your teams and embrace the idea that it’s not business as usual,” counterterrorism finance expert Juan Zarate said at the ABA summit in Washington, explaining moreover that the sanctions are a rapid and aggressive response of an unprecedented scale. and impact and “are not going to roll back tanks, but they can change the [Putin] plan calculation in terms of next steps.

Terry Monteith is SVP for Acquisition and Risk at BlueSnap.


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