Major western countries have announced coordinated sanctions against Russia.
For example, UK Prime Minister Boris Johnson announced all assets of major Russian banks will have their assets frozen and excluded from the UK financial system – asset freezes on 100 new individuals and businesses. In addition, the US also announced sanctions on billionaires and oligarchs close to President Putin, as well as Russian banks.
Russia is the 11th largest economy in the world, with large companies with multiple subsidiaries, so it is important, here, to recognize the implications of the Office of Foreign Assets Control (OFAC) ‘50% ownership rule’ – that is, any majority owned subsidiary is also automatically sanctioned if the parent company is sanctioned, irrespective of if the subsidiary company is listed on the OFAC list.
What happens now?
Implementing these sanctions could be difficult, as sanctioned Russian companies are aware of this ownership rule and will restructure their subsidiaries to continue to operate.
Therefore, banks will need to review their current clients and understand their ownership structure, while comparing the latest companies and individuals that have been sanctioned. They must, then, validate their subsidiary ownership structure, with the challenge being that these companies will deliberately dilute their subsidiaries to evade sanctions.
Another challenge is that sanctioned banks are owned by billionaires and oligarchs with direct links to President Putin. Banks will have to identify these individuals’ ownership of other companies and, in turn, validate if these companies’ assets need to be frozen.
The implication, here, is that, if these sanctioned billionaires/oligarchs are majority owners of these companies, it means these companies are in turn sanctioned. The bottom line is that banks must be able to identify these relationships – and quickly.
How to solve these challenges
In the increasingly complex world of Anti-Money Laundering (AML) compliance, identifying Ultimate Beneficial Owners (UBOs) is one of the most important tasks facing compliance teams, and also one of the most difficult. Unwrapping even the simplest of corporate structures to discover beneficial ownership and control is a challenge for banks under normal circumstances, never mind in this kind of situation.
Firms are increasingly turning to RegTech, which offers solutions which can be leveraged to ensure these structures are unwrapped and understood promptly and effectively.
With automation, financial institutions can be sure these critical tasks are being completed, without increasing workload, spend or risk.
The benefits of automated UBO identification and verification solutions for compliance teams include saving time and resources on the complex process of gathering and analyzing data from multiple global sources.
Specialised RegTech can also rapidly unwrap ownership and control structures for corporate customers, and automatically examine ownership relationships, calculating shareholding percentages and determining UBOs, in accordance with an organization’s compliance policies.
Author: Dr Henry Balani
Dr. Henry Balani is Global Head of Industry and Regulatory Affairs at Encompass. He is a noted industry thought leader and commentator on Regulatory Compliance issues and trends affecting the financial services industry. As a published academic, Dr. Balani also lectures on international business, economics, and regulatory compliance courses globally. Dr. Balani holds a Doctorate in Business Administration from the University of Wisconsin, an M.B.A. from Northern Illinois University in the USA, and a B.S. in Economics from the London School of Economics.