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Sanctions On Russia: What Banking Institutions Need To Know

In a press release dated February 28, 2022, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned the Central Bank of the Russian Federation by prohibiting transactions from the United States.

In doing so, the sanctions bring to a standstill the assets of the Central Bank of the Russian Federation held in the U.S. or by any U.S. individuals, whether the individuals reside in the U.S. or abroad.

An important OFAC’s prohibition is the sanction of the Russian Direct Investment Fund (RDIF). As per Secretary of the Treasury Janet L. Yellen’s announcement, “Today, in coordination with partners and allies, we are following through on key commitments to restrict Russia’s access to these valuable resources.”

The RDIF has been used to raise funds in the United States and abroad. It was created in 2011 and operates in the insurance, financial services, and other industries. The goal of these sanctions are to prevent Russia’s ability to raise funds for the continued invasion in Ukraine. (See Executive Order 14024 and revocation of General License No. 8 related to Energy for additional information.)

Removal of Russian Banks from SWIFT

The White House announced on February 26 the removal of selected Russian banks from the Society for Worldwide Interbank Financial Telecommunication messaging system (SWIFT). SWIFT is based in Belgium and is used worldwide to send and receive messages and money transfer orders between more than 11,000 banks and financial institutions.

The UK, Canada, France, Germany, Italy, and the European Commission have also agreed to the removal of selected Russian banks from SWIFT. This removal  disconnects them from international financial systems and hinders their ability to operate globally.

The sanctioned banks include Public Joint Stock Company Sberbank of Russia (to include 25 of its subsidiaries) and VTB Bank Public Joint Stock Company -  Russia’s two largest lenders. These two banks, combined, make up more than half of the total banking system in Russia by asset value. Other banks sanctioned were Otkritie, Novikombank, and Sovcombank.

The sanctions, essentially, prohibit business with the U.S. financial system, ban trade, and freeze their assets in the U.S. According to the Treasury Department, Russian banks conduct, on a daily basis, approximately $46 billion of foreign exchange transactions globally, of which 80% are in U.S. dollars.

National Bank of Ukraine and Martial Law Resolution

According to the National Bank of Ukraine (NBU), Resolution No. 18 was passed on February 24, 2022, instructing the banks on how to operate under the imposed martial law.

  1. Banks can operate their branches, unless there is a risk to lives and health of the public
  2. Banks can operate under the restrictions of the resolution
  3. ATM cash is replenished without restrictions
  4. Cashless payments go through without limitation
  5. National Bank of Ukraine provides unlimited cash support

Restrictions imposed are:

  1. Suspended operations of FX market, except for the FX sales by customers
  2. Limit cash withdrawals to UAH 100,000 per day
  3. Prohibit release of cash from client accounts in foreign currency
  4. Temporary prohibition on cross-border foreign currency payments
  5. Suspend issuing of electronic money, replenishment of electronic wallets with electronic money, and distribution of electronic money by issuing banks

The NBU addressed heads of central banks of G7 countries, European banks, and money transfer operator, Western Union, to stop the delivery of foreign currency to Russian and Belarussian banks.

Visa and Mastercard Deny Russian Banks Access  

Following the latest sanctions imposed by the U.S., Visa and Mastercard have blocked Russia’s financial institutions’ access to their networks. Mastercard stated it had “blocked multiple financial institutions” from its payment network. Mastercard added, ”We will continue to work with regulators in the days ahead to abide fully by our compliance obligations….” Visa stated it was “taking prompt action to ensure compliance with applicable sanctions….”

Fraud Exploiting the War in Ukraine

Unfortunately, times of crisis create a fertile ground for scammers, who follow headlines and attempt to defraud people willing to help a cause. The COVID-19 pandemic scammers cost Americans billions in stolen federal aid monies.

Fraudsters, using various methods, can easily solicit money under the guise of charitable foundations to help the people of Ukraine or for other purposes. Websites, email, texts, and social media are all mediums used by fraudsters.

It is important to be extra vigilant with websites that do not explain how donated funds will be used, and whether the site represents a legitimate organization.

Your email may be exploited with emotional pleas for donations, requesting money or digital coins. Social media outlets are also vulnerable to fraud as they tend to reach a large audience. If in doubt, you may want to contact your state consumer protection office, and the Federal Trade Commission.

What U.S. Financial Institutions Need to Know

U.S. financial institutions that have relationships with correspondent banks in Russia may want to be vigilant of possible retaliatory cyberattacks from Russia. Cybersecurity has always been a major concern for financial institutions worldwide, but now more than ever financial institutions need to be cautious of additional challenges in this area.

Now is the time to review and update operational processes and procedures to ensure compliance with U.S. sanctions. Compliance and procedures are also extremely important for financial institutions who do not do business with corresponding banks in Russia due to the extra oversight by regulators during and beyond the sanctions imposed by the U.S.

Other areas of significant importance to U.S. financial institutions during and beyond the sanctions are Know Your Customer and Anti-Money Laundering Compliance Programs -  particularly with regards to cryptocurrency.

In the following days, Regology will explore the topics of how Anti-Money Laundering and Cryptocurrency affect the U.S. sanctions.

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