Banks Still Doing Legitimate Business in Russia, Putting U.S. Dollar-Clearing at Risk, Experts Say

As U.S. banks continue to struggle to ensure compliance with sanctions Washington and its allies have imposed on Russia over its invasion of Ukraine, cracks are emerging in the trust that Western banks have in one another’s compliance programs, in some cases leading to suspension of so-called correspondent banking ties that facilitate the clearing of U.S. dollar payments, experts say.

These trust issues, which are in part linked to differences in sanctions-risk tolerances at various institutions, come to a head when one bank has chosen to do still-permissible – yet potentially risky – business in Russia, while another bank in its U.S.-dollar payment clearing chain has opted to take a safer approach by severing all ties – direct and indirect.

“I’m now seeing correspondent banking services suspended from U.S. and European banks against Western banks continuing to legally operate in Russia. The law doesn’t oblige them to do this, but from a risk appetite standpoint, there is a fear of indirect Russia sanctions risk from these banks that continue to finance Russian activity,” said Daniel Tannebaum, a former compliance officer with the U.S. Office of foreign Assets Control (OFAC), the U.S. Treasury Department agency responsible for administering sanctions.

In a call with Regulatory Intelligence, Tannebaum added that such correspondent banking suspensions have occurred in “a few limited instances, not in a systematic manner,” but it appears that the longer the war in Ukraine continues and news of atrocities emerge, “I think you’ll see more of these situations.”

“Every bank that performs U.S.-dollar clearing services is very closely monitoring their risk tolerance related to Russia, especially with any broader concerns around indirect sanctions risk. So, if you’re ultimately financing activity that could have a hand in Russia – and you don’t feel comfortable with that – then there could be decisions made to suspend that business,” said Tannebaum, now partner and global head of sanctions at Oliver Wyman in New York.

And beyond sanctions, ESG “ramifications,” or reputation risk, are coming to the forefront as media reports show images of war-torn Ukraine, he said.

“That may come up more in the coming weeks as Russia withdraws from certain parts of (Ukraine) and we’re now getting a close look at what atrocities were committed on the ground,” Tannebaum said. “That could drive a further wave of exiting (of correspondent banking ties).”

South Florida banks’ ties to Latin America among those being tested

Regulatory Intelligence convened a discussion of three Miami-based anti-money laundering and sanctions compliance experts on Wednesday to consider how the bank-to-bank tensions are playing out in one region – South Florida – which is a hub for the financing of international trade, especially that tied to Latin American nations.

Latin America “worries me a lot,” Daniel Gutierrez, a Miami-based bank compliance officer and chair the Financial & International Business Association (FIBA) anti-money laundering compliance committee, said during the meeting.

Latin American nations lack the legal infrastructure to impose the kind of economic sanctions that the United States, UK, EU and other nations are bringing to bear against Russia, he said.

Gutierrez said he was aware of at least one Latin American nation that has historically purchased certain military material – including helicopter components – from Russia, a fact that concerns him given the current circumstances.

“What worries me the most is that we would have prohibited transactions flowing through foreign correspondent banking and at face value – (as the U.S. bank sanctions compliance officer) – you don’t know the purpose of that transaction,” he said.

Complexity and lack of local sanctions laws may trump OFAC compliance vows

Correspondent banking agreements that U.S. banks have with foreign counterparts require compliance with OFAC sanctions, Gutierrez said.

“But the complexities of the (U.S.) executive orders and OFAC general licenses that are coming out with respect to Russia sanctions are very complex, and it’s not about just screening against names on a list,” he said.

Gutierrez added that when U.S. presidential executive orders are issued to implement or supplement sanctions against another country, his bank has “a committee where we stop everything we’re doing and look at the verbiage of the stuff that is prohibited and the stuff that you’re allowed to do, and then we deploy it on the areas of the bank that could be affected.”

“That’s what worries most, is the complexity,” he said, expressing concern that foreign counterparts may not have processes and resources in place to ensure compliance.

U.S. banks “can’t depend upon other financial institutions to carry out the same level of diligence that we are going to, and in Latin America it starts with the fact they don’t have the legal frameworks to impose these sanctions,” David Schwartz, chief executive of FIBA, said during the meeting.

“If it’s not a legal obligation locally, how do I know that you are going to carry out what I’m asking you to?” Schwartz said.

He added that many correspondent banking relationships between U.S. banks and their peers around the world in nations seen to have weak anti-money laundering regimes have been “hanging by a thread” for years.

“So, do I trust they’re going to (comply with the Russia sanctions)? Or do I say ‘This relationship isn’t really profitable anyway, so why don’t I just suspend it right now?'” Schwartz said. “Then we can review it down the road.”

Banks in Latin America and the Caribbean, or anywhere in the world, that want to maintain U.S. correspondent relationships during this time of tremendous and complex sanctions against Russia “have to be ready to provide to the bank here the materials and documentation that makes the bank here want to keep their account open,” Patricia Hernandez, founding partner, Avila Rodriguez Hernandez Mena & Garro LLP in Miami, told Regulatory Intelligence during the meeting.

While none of the experts on the call suggested the wholesale exiting of correspondent ties as a solution, they said it is of great importance that U.S. banks maintain an awareness of precisely what steps the banks they are linked to are taking to ensure compliance with sanctions the U.S. government and its allies have issued.

There are banks in the U.S. that are doing perfectly legitimate business in Russia, but others “have de-risked from Russia period, (saying) ‘I’m not sending wires to Russia, I’m not doing that, so find an alternative route (for your payments),'” Hernandez said.

“Their perspective is ‘I don’t want to spend resources having to look at each transaction because it’s an enormous cost,'” she said. “It’s a cost-benefit analysis for the bank, to determine whether the (correspondent relationship) is worth maintaining if you have the risk of potential sanctions exposure.”

Best practices for institutions seeking to keep U.S. banking ties

For banks that want to avoid losing their ability to clear U.S. dollar payments, the best approach is to proactively protect their correspondent relationships “and say to the bank in the U.S., ‘I know Russia is an issue for you, this is what I’m doing (to ensure compliance with U.S. sanctions)’ even before the bank asks,” she said. “They need to make their correspondent comfortable.”

It would also behoove such banks to “lawyer up” in the United States to obtain guidance and the ability to meaningfully engage with OFAC when questions arise about customer activity, Gutierrez said.

“They should identify which of their customers import and export from and to Russia, do a cost-benefit to determine if it’s really worth (keeping the customer), and hire U.S.-based attorneys so that when we (as the U.S. bank) stop a transaction, they can say ‘Wait a second, I got with my attorney, went to OFAC and got a specific license, so process (our transaction)’ and then we feel comfortable and the transaction flows,” he said.

Although requiring a foreign correspondent account holder to certify that it is complying with OFAC sanctions can be useful where no conflict of law exists, “you can’t be willfully blind and you have to be able to trust that they will comply with the certification,” Hernandez said.

“There’s been cases – many times – where they’ll sign the certification and then you’ll realize ‘Oh, they’re not really doing anything to make sure that they’re complying,'” she said.