The United States, Canada, European Union, and United Kingdom have announced respective economic sanctions targeting Russia’s financial services sector. These sanctions have been designed to limit Russian access to global financial markets as a result of the current conflict. While certain sanctions – detailed below – will result in an ongoing ripple effect for many firms, there a few steps investment advisers should immediately prioritize in order to reduce and mitigate compliance risk:
- Identify any business dealings with any person or entity recently added to the Specially Designated Nationals and Blocked Persons (“SDN”) list and determine next steps
- Identify any contractual commitments with Russian, Ukrainian, and Belarusian counterparties in order to assess risk
- Review restricted lists to add securities and exchanges as appropriate
- Review internal anti-money laundering (“AML“) procedures, if any. Additionally, coordinate with broker-dealers to ensure they are performing the appropriate reviews
- Update client intake processes as needed, imposing stricter procedures or guardrails to avoid taking on clients that may in the near future be subject to expanded sanctions
With respect to the sanctions levied by the U.S., there are multiple categories to which investment advisors should pay particular attention:
- Some of Russia’s largest financial institutions have been hit with sanctions. This includes two large banks – (a) Promsvyazbank Public Joint Stock Company and (b) Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank – being added to the SDN list.
- Certain Russian oligarchs are subject to asset freezes, meaning they can no longer access property or engage in financial transactions in the U.S.
- Most financial activities to the two regions of Ukraine that Russia recognized as independent – (a) Donetsk People’s Republic and (b) Luhansk People’s Republic – are prohibited.
- The Russian central bank has been blocked from selling bonds into the U.S.
- For certain key Russian banks, access to the Society for Worldwide Interbank Financial Telecommunication (“SWIFT”) network will be limited. SWIFT is the financial institution messaging system used to make cross-border payments.
While the above is not an exhaustive list, it does address core sanctions intended to limit Russia’s access to the U.S. dollar.
Registered investment advisers (“RIAs”) are not tasked with enforcing AML obligations, as it is typically the broker-dealer/custodian that bears the AML burden. That said, many RIAs have in place an AML policy, which, once adopted, must be followed by the advisory firm.
In the context of the Russia-Ukraine conflict, advisers should be aware that there could be an increase in Russian nationals trying to move money. Because of this, RIAs must be highly diligent in regards to following any AML policies with respect to new or existing clients. Additionally, the potential for future expanded sanctions has made it prudent for RIAs to continue monitoring the SDN list. For more on investment advisers and AML, click here.
Cybersecurity has long been heralded as one of the most critical priorities for financial institutions, especially given the increase in attacks over the last decade. In fact, due to ongoing cyber threats, The U.S. Securities and Exchange Commission (“SEC”) recently issued a rule proposal related to cybersecurity risk management for RIAs. However, with respect to the conflict in the Ukraine, RIAs across the U.S. and abroad must consider whether they are at increased risk of cybersecurity threats. While it’s impossible to predict the timing or origin of a cyberattack, it’s reasonable to expect that financial institutions incorporated in areas which have sanctioned Russian interests may face an increased level of threat.
Regardless of the Russian-Ukrainian clash, investing in proper cyber hygiene should be a focal point for all RIA in today’s environment. For more on investment advisers and cybersecurity, please see:
- Managing Cybersecurity Risks in an Uncertain World
- How the RIA in a Box Cybersecurity Compliance Platform Helps RIA Firms
- Tips & Tricks for Chief Compliance Officers: Cybersecurity
- SEC Rule Proposal for Cybersecurity Risk Management
Looking to talk cybersecurity? Contact RIA in a Box.
The U.S. and other western powers have signaled that they will increase penalties against Russia should the conflict continue, meaning that RIAs and other financial institutions will need to continue monitoring sanctions and broader developments concerning Russia. ComplySci and its companies – RIA in a Box, NRS, illumis and Itegria – will continue to provide actionable advice for their customers during this time of concern.
Download the full infographic for information on sanction updates and the compliance implications.