12 minute read
Payments special op
As the Ukrainian/Russian war continues, the sanctions stakes are getting higher. Companies need to roll out the virtual big guns to identify who they’re really dealing with, as Tracy Fletcher reveals
Increasingly heavy weaponry is raising the stakes as the war between Russia and Ukraine enters its fifth month, and the world of paytech is continuing to respond in kind by doing everything possible to squeeze the aggressor’s capabilities by stopping its funding lines.
Industry players are adding new battle tactics to help make individuals and companies linked to the Kremlin answerable to the sanctions also imposed to slow its ingress.
Because, when Russia invaded Ukraine In February, it kicked off a conflict unlike any other. Measures adopted by the West to try to stop the horrifying Russian assault in its tracks, have been rooted as much in economic and financial tactics and the cyberverse, as they have in the supply of tanks and artillery.
Russia’s central bank reserves have been frozen for several months now, and, in arguably the most powerful move to date, the country’s banks have been denied access to cross-border payments system SWIFT – preventing Russian businesses from trading on the world stage, and individuals from buying goods using major card networks like Mastercard and Visa. PayPal, too, withdrew its services and major international chains like Starbucks and McDonald’s followed suit.
As a result, 30 per cent was initially wiped off the value of the Russian ruble, forcing the Central Bank to hike interest rates to 20 per cent. The West is now seeking to strangle the ensuing recovery, widening the net of sanctioned Russian individuals and businesses, and increasing the penalties for anyone engaging with them.
European Union (EU) leaders reached a deal, in late May, to ban most of the Russian oil imports also funding the onslaught, with an embargo on imports of oil and petroleum products, to be followed by ceasing pipeline imports to Germany and Poland and affecting 90 per cent of Russian supplies by the year-end.
In May, the EU also made breaking sanctions against Russia an offence in all 27 EU member states – with penalties of up to seven years’ imprisonment. And the UK has since introduced a strict liability rule, which effectively means an ‘accidental’ breach of sanctions (because the defendant was ignorant of an individual’s status) is no defence.
So far, the EU has frozen 10 billion euros in physical assets and more than €20billion in bank accounts belonging to Russian oligarchs, and in May it extended sanctions to close family and associates of President Vladimir Putin, to maximise discomfort among his inner circle and prevent them from harbouring his assets.
The US has also supported the counter-fight, with economic sanctions and export controls. Its recently announced, eighth round of sanctions includes prohibitions on dealings with
certain Russian banks, bankers and television stations; access to accounting and management consulting services; and imports from and exports to Russia of a wide range of luxury, technological and industrial goods. There are also now visa restrictions on thousands of Russian and Belarussian military officials. Additions to its sanctions lists in June included current and recent Sberbank executive board members, Gazprombank directors, Moscow Industrial Bank and 10 of its subsidiaries, private Russian defence company LLC Promtekhnologiya and state-owned television stations Channel One Russia, Television Station Russia-1 and NTV Broadcasting Company. To date, more than 1,000 private sector companies have withdrawn from Russia and more than 200,000 Russians have also fled the US.
However, imposing such restrictions on those wielding power within the Russian regime is one thing, ensuring they bite quite another.
“The breadth of influence of Russian money in the UK and London is very large and often hidden behind different shell or front companies, so often people that had very large exposures to people that have now been sanctioned had no idea. So, the big challenge is the hidden risk and how companies, not just in lending, gaming, gambling or banking – every industry – react to that,” ComplyAdvantage CEO Charles Delingpole told Sky News a month after the war began. By then, the counter-risk intelligence regtech said, more than 4,500 sanctions had already been imposed on Russian companies and individuals globally. By the end of April, that number had increased to 8,200.
To keep pace with daily new additions to sanctions lists and ensure they don’t fall foul of the penalties, companies now face the pressure of continuously updating screening and compliance programmes.
On the eve of war in Ukraine, ComplyAdvantage warned firms in its State of Financial Crime 2022 report that the use of sanctions would become more frequent, widespread and co-ordinated – and firms should ensure they have ‘robust adverse media, sanctions screening and payment filtering systems in place in order to identify any changes made to sanctions lists as political events impact the addition or removal of economic, trade and financial sanctions’.
It pointed to increasing examples of like-minded states co-ordinating sanctions to maximise their impact. Indeed, in December 2021, the UK, US, EU and Canada had done just that against Russia’s ally in the war, Belarus, for ‘continuing attacks on human rights and fundamental freedoms… disregard for international norms and repeated acts of repression’.
There were other examples last year, too. The increasing use of Global Magnitsky-style (Global Magnitsky Human Rights Accountability Act or GloMag) sanctions programmes are forcing international businesses to revisit their risk calculations. GloMag, named after the Russian whistleblower Sergei Magnitsky, who was tortured and died in a Russian prison, originated in the States in 2016. Copy-cat versions have since emerged in Norway, Australia, the EU and Canada, helping authorities to target human rights abuses and corruption.
Charles Delingpole, ComplyAdvantage
As ComplyAdvantage pointed out in its report, during the US Summit for Democracy week in December 2021, the US federal government released new GloMag sanctions every day, graphically illustrating the near-impossible task of keeping pace manually with the law if you operate across borders.
“Sanctions, money laundering, terrorist financing have always been huge issues… [but] the level of innovation required to counteract the Russian war machine is something we’ve never seen on this scale,” said Delingpole.
So, telling a compliance team to assess your business’s exposure to risk in the current context is a big ask. For fintechs especially there is also the uncomfortable realisation that their early success might well have been funded by Russian money. There was more than one oligarch sitting on cap tables in Silicon Valley, but many VCs aren’t required to disclose who their investors are.
In fact, the war has further highlighted weaknesses in the monitoring of assets as they flow around the world.
The Panama and Pandora papers earlier demonstrated how the true owners of significant wealth – cash and real estate – have become adept at using frontmen and women acting as their agents in different countries, or using offshore bank accounts in locations like the Cayman Islands. And the sophistication of the steps individuals are prepared to take to fly under the radar is only increasing. Which is why identification verification (IDV) experts like Trulioo are having to work harder still to get to the truth.
Garient Evans, the company’s SVP of identity solutions, explains how it is adding more weapons to its own armoury to help firms gain that transparency.
One such is AI to mine more online information sources about companies and those within them – including ‘softer’ data sources, like media.
So, what trends has Trulioo observed in this space since the conflict began?
“In the United States, we’ve seen a number of executive orders,” he explains “The president has said we’re going to identify individuals who should be sanctioned, and that’s been reinforced. We have an institution called FinCEN, a subsidiary of our Treasury Department, which dictates what’s legitimate activity and what’s not. On 7 March, overnight, it listed an exhaustive set of activities that financial institutions are supposed to be undertaking to ensure compliance with these executive orders.
In many ways, it’s a refresher, effectively saying ‘you know all these things you’ve been looking out for? Now, they really count, and you should pay particular attention to Russia and Belarus’. saying ‘you know all these things you’ve been looking out for? Now, they really count, and you should pay particular attention to Russia and Belarus’. It lists suspicious activity reports to be filed, and gives more specificity on what firms should do, and where they should look. In many ways, it’s a refresher, effectively
“It talks about IP addresses originating from sanctioned areas, and individuals on lists who should be treated in a particular way. And it talks about predicate activities, like when a new account has been opened and is receiving funds from such individuals, amidst news items about the mistresses, children and cronies of oligarchs, and how this should be handled.
“But it’s when we look at businesses that we find the biggest challenge and the murkiest waters. Because, let’s be frank, the creation of businesses, the assets within them and the jurisdictions where they’re allowed to operate under the radar, are all opaque.
“This has been a practice for a long time, with offshore accounts in places like the Cayman Islands known around the world as a way to store assets and save them from being taxed. But they’re also taken advantage of by money launderers, terrorist funders, narco traffickers and oligarchs.
“This has become a legitimate – and I say legitimate because legal – way to distort funds. The alert I'm talking about says we should be examining these businesses and understanding who the beneficial owners are. But it has no real teeth behind it, because it doesn't change anything about registering.”
Europe, by contrast, is following through, continues Evans.
“Europe is on its Sixth Anti-money Laundering Directive (AML), and already working on its seventh. Any organisations that haven’t read it should go and do so because it has real enforcement action. It says countries governed by the EU need to establish local registries for beneficial owners and make them available for financial institutions to use to determine who the beneficial owners and persons of significant control are within businesses, to make sure they have proper controls in place and can enforce the sanctions.”
That’s focussing minds across the business world, says Evans.
“We’re already seeing companies turn their attention to this latest directive, seeking our help with understanding what’s happening in different countries, with local registries, and saying ‘we’d better pass our audits and meet these statutes because we know there's some urgency’, particularly companies operating in Europe,” adds Evans.
“It has caused firms to shift their priorities because it has, among other things, some clear language around culpability. It says things like ‘if your financial institution is knowingly or unknowingly violating these sanctions and regulations, the persons in charge can go to jail’. And the important part of that is the word ‘unknowingly’ – even if people are unaware, the consequences could still be jail time.
“And the EU has no difficulty fining companies, even companies that are making an effort to comply, if they’re not going fast enough, or doing enough.”
But will this tough talk – and action – from the EU spark a ripple effect around the world? “What the EU is doing is going to help, as will any activity driving change in the way institutions prioritise this, choose new technologies and add staff to do what they can to shore up any gaps,” adds Evans.
Garient Evans, Trulioo
“I think of it as a seesaw. The US tolerates tremendous gaps when it comes to really solving these problems. With the Panama Papers, we saw that there are states in the US that act just like any of these offshore countries, which will allow the registration of trusts and businesses that could have a lot of illicit activity happening – third-world country leaders have stored their money in these states and have trusts set up. That's probably also true for oligarchs and those being sanctioned.
“In particular, we have no regulations for real estate, art and collectibles. So, you can come to the US, buy a very expensive piece of property for cash, and all of the individuals associated with that transaction have almost no obligations, even though there might be suspicious activity associated with it. And this has a lot of implications for cryptocurrency now, too.”
So, there is significantly more still to do, in the US, to overcome this problem.
“At the moment, the orders are not targeting any of the fundamental infrastructure,” continues Evans. “That still allows some of this activity and opaqueness to occur.”
It results in challenges for businesses that Trulioo is working hard to help them overcome.
He explains it like this: “The sanctions are targeted and identity matching is hard. If Fred Smith does something bad and finds himself on one of the sanctions lists, there are a lot of Fred Smiths and, unfortunately, a lot of them live on 123 Main Street, and all of those unfortunate Fred Smiths get captured into that process, in false positives. It is a nightmare for any payments, money transfer or cryptocurrency institution to find the right and legitimate Fred Smith, who’s on the naughty list, and separate him from all other Fred Smiths.
“So, in the last four months, we’ve ramped up our efforts by deploying AI, in addition to our usual strong data science. A good example of that is where you see names repeated over and over again in social media or news sites. We’re using AI to crawl the worldwide web and identify mentions of sanctioned individuals – what we call adverse media. That intelligence helps us tell if we have the right individual and feed this back to our clients.
“Such information is really powerful, as it identifies both those sanctioned and their associates. And it’s increasingly critical because there are more than 6,000 lists we monitor and individuals are being added to or removed from them all the time.
“Our goal is to hone in only on right and proper matches, so that our clients have to invest less and know they’re only focussing on legitimately bad actors. This means they sleep better at night because they’re not going to unknowingly allow activity that can have serious repercussions for them.”
Go to our website for an exclusive interview with Igor Tomych, founder of Ukrainian fintech developer DashDevs, on fleeing Kharkiv and running a team in exile.
