In recent years, the financial services industry has undergone an extraordinary evolution. Transactions that were once only possible to conduct by physically attending a bank, can now be conducted with the touch of a button on a smartphone app. What hasn’t changed, is how those transactions move around the world.
We don’t often consider the fundamental elements of the global financial system, so it’s easy to forget that when we send payments around the world, money doesn’t physically move from one bank to another. Instead, money is moved across a global network of financial institutions through messages.
On any given day, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) sends on average 42 million messages through a global messaging system. This transmits transfer instructions across a network of over 11,000 financial institutions in more than 200 countries.
Global economies rely on the efficient movement of funds in order to facilitate trade and exchange between enterprises and consumers across the world. Exclusion from SWIFT can have a detrimental impact, leaving banks without the ability to communicate securely with global financial institutions.
In a historic move, the European Union, UK, US and Canada have agreed to block selected Russian banks from the SWIFT messaging system, effectively cutting them off from the international financial system. Following the publication of regulatory amendments in the Official Journal of the EU, certain activities will be prohibited, including the provision of financial messaging services to seven named Russian financial institutions. The objective is to prohibit Russian institutions from accessing SWIFT’s payment system and prevent them from operating globally. This is just the second time in its nearly 50-year history that an agreement has been reached to remove a country from SWIFT. In 2012, Iran was removed as part of a suite of sanctions over its nuclear program, the result of which caused Iran to lose almost half of its oil export revenues and 30% of foreign trade.
How is this latest ban impacting day-to-day operations within banks?
As sanctions measures develop, every financial institution across the globe will be carefully assessing their exposure to Russia. Operations and compliance teams will be applying a major focus on accounts and relationships that may have connections to Russian entities and individuals, including politically exposed persons (PEPs). This is a hugely complex task for some banks, with many still using multiple systems to maintain information for a single client. The challenge is further exacerbated where information is stored in digital documents rather than in a rules-driven database, leaving no option but to manually review client files. The lack of a holistic client view will make it difficult for financial institutions to quickly identify which clients (many of which have complex ownership and control structures) have beneficial owners with roots in Russia or exposure to Russian PEPs.
Why enhanced due diligence and effective KYC remediation has never been more crucial
Whilst the SWIFT ban and comprehensive sanctions programmes remain in place, Russian banks, individuals, and entities will still want access to the global financial system for legitimate purposes. However, criminal organisations will also continue to seek access to financial services to continue illegitimate operations and may divert activity through banks in countries that have not imposed a ban, or through other illicit means. Extra vigilance is required to ensure that any activity that may have ties to sanctioned individuals or entities are identified and blocked in-line with sanctions compliance obligations. Furthermore, if Russian criminals have been frozen out of the global banking system, the question looms as to whether they will be driven further into the volatile and clandestine world of cryptocurrencies to continue their nefarious activities.
The evolving sanctions landscape will have a profound and immediate impact on banking operations. Financial institutions are already under pressure to comply with ever-changing regulatory obligations, while balancing the demands of their customers. In a recent Fenergo webinar on financial institution enforcement actions with guests Oliver Bullough and Jim Richards, we carried out an audience poll of global financial institution professionals and 48% admitted that their firms’ client due diligence was only partially effective. 67% have not yet defined a strategy for dealing with the potential risks presented by cryptocurrencies.
As the current situation unfolds, it remains to be seen how the global banking system will respond to the latest challenges being added to their growing lists of obligations. What is crucial now is automating client due diligence and client behavioural analysis to ensure real-time identification of emerging risks. This will allow financial institutions to immediately update sanctions programmes and policies, ensuring the protection of their institution and the wider financial industry. Industry-wide collaboration is also key; without the sharing of standardized, actionable data between organisations in all sectors, attempts to prevent funds flowing in from sanctioned countries will be futile.