Sanction Screening in the Time of War

War in Europe

After eight years of military posturing and strong rhetoric following the annexation of Crimea in 2014, Russia has invaded Ukraine, signaling the first major war in Europe in the 21st century. It has resulted in a humanitarian crisis, seeing at least two million flee Ukraine at the time of writing. 

The political and economic condemnation from the international community has been swift, as has Russia's expulsion from the SWIFT payments network. A raft of new sanctions was announced almost immediately from the US, United Nations, and the United Kingdom. 

What is SWIFT? 

SWIFT (Society for Worldwide Interbank Financial Telecommunication) is the backbone of international payments; the real-time gross settlements system allows banks across the world to rapidly and securely send and receive instructions, including money transfer instructions – this is what allows money to move across borders within days rather than weeks. And these messages are sent at an astronomical scale – in 2021, approximately 42 million messages were sent per day. SWIFT connects 11,000 financial institutions across the world and operates in virtually every jurisdiction.  

Due to Russia’s further invasion of Ukraine on 24 February 2022, the US, UK, European Commission, Canada, France, Germany, and Italy all confirmed the decision to expel Russia from SWIFT. The expulsion was announced on 2 March 2022 and comes into force from 12 March 2022, giving Russian banks only 10 days to wind down their services and finish processing all payments. 

This measure is extreme, effectively cutting off Russia from participating in the global economy at any functional speed. However, it only effects five of the seven Russian banks for some jurisdictions. Sberbank and Gazprombank have not yet been excluded from SWIFT due to the European Union relying on them for energy payments to the bloc, Russia currently supplies 40% of the EU’s gas needs, although plans are in motion to change this. 

Sanctions against Russia 

Many of the sanctions against Russia have been targeted, affecting specific individuals rather than a blanket ban on operating with the nation. These sanctions appear to be applied almost exclusively on PEPs (Politically Exposed Persons), primarily on oligarchs who have become billionaires and multi-millionaires through their relationships with Russian Prime Minister, Vladimir Putin. The list includes politicians, businesses, and general restrictions to all Russian citizens – in the UK, wealthy Russians are limited to £50,000 from banking services. 

Many of these oligarchs and entities have international wealth, with mansions and businesses located in London a common theme. However, the sanctions call for a complete asset freeze and travel ban,  meaning they will not be able to access these properties.  

So far, mainly Russian oligarchs and their families, aka RCAs (Relatives and Close Associates), have been sanctioned (and at varying levels of severity across jurisdictions), but more are expected to come soon. UK Prime Minister, Boris Johnson has pledged to publish a full list of those associated with the Putin regime, presumably with a view to sanctioning these entities, yet the UK has sanctioned far fewer entities in Russia than the US or EU. 

What is the impact on financial institutions? 

All of this makes for a complex and confusing state of affairs for financial businesses to operate in. The geopolitical landscape of Eastern Europe has now become a minefield of potential money laundering operations as those who were previously moving money through SWIFT are not simply going to stop.  

Workarounds will be sought after but the global financial system lacks holistic views of data, so identifying the source of funds for a transaction is difficult at the best of times. It will be even more difficult now, especially for those nations that border Ukraine and Russia where compliance teams will have to increase their scrutiny to make sure they aren’t facilitating the movement of money from Russia.  

Compliance in Eastern Europe has grown beyond the scope of human-only solutions. Spreadsheets documenting transactions are set to become hopelessly convoluted and lacking compared to the influx of new dirty money.  

In the case of Sberbank and Gazprom bank, the effectiveness of this sanction is questionable. The six Russian banks that have been expelled from SWIFT represent just 25% of the Russian banking system in terms of economic power, with most of the money residing with Sberbank at 37.5 trillion roubles when last checked in 2021.  

But the effectiveness of sanctions is not the overriding concern for businesses, it’s to make sure that they meet the compliance demands of their local regulatory jurisdictions. This means making radical changes to transaction monitoring rules already in place and modifying your sanction screening program. And more than that, there’s a looming deadline of 12 March 2022, meaning your compliance teams are working at breakneck speed to try and adapt to almost unprecedented changes.

Will SWIFT Expulsion be effective?

That said, this has happened once before. In March 2012, Iran was expelled from SWIFT and subjected to sanctions on a similar scale. Back then businesses also had a brief time to adapt to the change, but unlike Russia, Iran was not hugely connected to the global financial system and did not have as many international dealings compared to wealthy nations, so the total volume of money moving was not comparable.  

Russia was a member of the G8, the eight wealthiest nations in the world, it transacts significantly across the globe and that wealth is not going to be dropped by those profiting just because of sanctions. Now more than ever, businesses need to take a close look at how they examine transactions in the region and re-evaluate how they flag suspicious behavior. 

How can this be solved? 

The interaction between sanction screening and transaction monitoring sits at the heart of this problem. Processing and flagging thousands of transactions that were previously fine means a huge increase in your compliance teams’ mental load and actual workload.  

Integrating sanctions screening with transaction monitoring is one way to rapidly react to the new load of sanctions. Transaction monitoring capable of real-time identification of suspicious activity is key to detecting money movements that are attempting to circumvent SWIFT expulsion and the heavy sanctions made against Russia.  

Transactions will be made despite the sanctions, so investigations will be vital for businesses operating in and near the Russian markets, especially for those bordering nations which are high-risk due to their proximity.  

When it comes to huge sums of money transacting, it can feel almost impossible to stop the flow. Sanctions are one way to prevent the money from moving legitimately but without the right processes in place to identify disguised money movement, financial institutions will not be able to effectively enforce these sanctions and open themselves up to significant regulatory and reputational risk.  

The UK government recently alleged that a war crime is being committed hourly in Ukraine by the Russian military. Sentinels is committed to standing against all inhumane crimes as a matter of principle and stands firm with Ukraine in this conflict.