Risk Management

The payments and beneficial ownership quagmire of Russian sanctions

Published: May 2022

Sanctions are an extension of government foreign policy and a breach can unleash profound financial and reputational implications. Treasury’s role in ensuring compliance of the unprecedented and sweeping sanctions in response to Russia’s invasion of Ukraine is both vital and complex.

Close up of Russia on a map

Ever since western economies imposed sweeping and unprecedented sanctions on Russia’s oligarchs, central bank and SOEs, international banks have scrambled to manage their Russian exposure, particularly in their investment banking operations, alert to suspect shell companies and third parties, or sanctioned entities evading SWIFT to send and receive funds via crypto transactions. Meanwhile, corporates have rushed to ascertain beneficial ownership in their supply chains and ensure no payments to or from sanctioned entities pass through treasury, juggling the challenge of ensuring the company fulfils its contractual obligations while remaining inside covenants as the rulebook for doing business in Russia is changed for the foreseeable future.

Sanctions have been around for years, and companies are well prepared with controls and screening processes. But even corporates with the most robust sanctions programmes and limited direct exposure to sanctioned entities were caught unaware by the scale and speed of their imposition in February 2022. “We have a well-defined process that involves sanctions checks on all our customers, vendors and banks. We were able to ease the latest Russian sanctions into this existing compliance structure however the breadth and velocity in which they were implemented was challenging,” says Dubai-based Toby Shore, Senior Director and Group Treasurer at Emirates Global Aluminium, one of the world’s biggest aluminium producers where minimal Russian exposure in dollar terms rests in a handful of relationships. Despite the UAE not imposing any sanctions on Russia, the risk of a breach of sanctions would be far reaching, especially regarding financial covenants in syndicated financing documents with US-based lenders, including multilateral agencies. “A breach of sanctions could cause large reputational damage to EGA as well as possible fines and the financing being called in,” says Shore.


For many companies with Russian exposure, one of the biggest treasury challenges has manifest in paid for goods not being delivered bringing a new level of risk into pre-payment structures. Although Russian entities are still legally able to export their goods, transport is scarce. Witness how container shipping lines have suspended new bookings to Russia for fear of carrying sanctioned cargo while Europe’s ports have clogged up because of customs checks to comply with sanctions. Elsewhere grain, iron ore and oil exports from the Black Sea are stuck after the region was classified as a high-risk war zone by the Joint War Committee, an advisory body that guides insurers.

“Pre-paying for goods and services with entities in sanctioned countries during times of geopolitical tension is a first order of risk,” says payments expert Natasha de Terán, former Head of Corporate Affairs at SWIFT, a member of the Bank of England’s CBDC Engagement Forum and the author of “The Pay Off: How changing the way we pay changes everything“. She notes that the due diligence cost incurred by banks seeking to execute legitimate Russian payments on behalf of clients is likely to have risen to such an extent that the fees they can charge for doing so will have become punitive for their clients, especially when the cost of currency volatility on the conversion is factored in. And this is on the assumption that corporates can find banks willing to transact on their behalf in the first place. “Banks can prevent you doing what could be legitimate because the legal and reputational risk they themselves face is so significant; the uncertainty and complexity of existing sanctions, coupled with the likelihood of sanctions escalation means they will often over-comply with sanctions. Banks may often refuse to deal with entities because they might be sanctioned in the future, or because they are on another country’s sanctions list,” she explains.

Beneficial ownership

The impact of sanctions on corporate supply chains holds another layer of even more complex and onerous processes. Companies are scrambling to ascertain the true ownership structures of their Russian customers, suppliers, partners, service providers or contractors in what can amount to thousands of relationships lest they are owned by a sanctioned entity. Until now, many corporates selling and buying uncontroversial Russian products had no obligation to know the ownership structures of their customers in this kind of depth, says Andrew Henderson, Head of Due Diligence Proposition at LSEG and an expert on third-party risk. “They have been under no obligation to know the ownership structure behind their customer but in a significant change, they now need to know ultimate ownership.”

The process is particularly challenging when it comes to ascertaining the ownership of companies in the supply chain. “It can be very difficult to see the whole ownership chain of a business,” explains Heather Robinson, Head of FS Operations at KonexoUK, a division of Eversheds Sutherland who reports an upcoming dramatic increase in companies’ due diligence workload. “Before, due diligence typically involved being able to identify beneficial owners of anything more than 20% of a business, dependent on risk posed to the business and the risk appetite of the firm. Now, our clients say they need to know the ownership structure down who owns 1% of the business.”


Getting the due diligence and onboarding right has pushed technology centre stage. Corporates can no longer rely solely on banks’ screening technology to manage their sanctions risk and need to integrate sanctions screening tools into their own treasury management system (TMS) or use third-party screening programmes to flag any suspicious transactions. Technology is a vital tool, agrees LSEG’s Henderson who notes that once companies have identified beneficial ownership, they can apply sanction screens in a workflow process. “For most of our clients, sanctions are just one of the risks in their supply chain or distribution channel but the rate of change in sanctions has increased their focus,” says LSEG’s Henderson.

That said, many companies are relying on manual processes to check the sanctions list (which in the early weeks of the war increased by over 300 names on one day) with their customer base. Sifting through a paper trail written in Russian to ascertain beneficial ownership is daunting enough, especially combined with different countries having different sanctions. “It’s not a one size fits all,” says Robinson, “Companies are really feeling pressure in terms of screening and the volume of changes because of the reputational pressure of being caught out.” Next, companies need to put monitoring processes in place and stay across any changes to the list in a case management process that incorporates legal advice. “If these processes are weak, companies will find themselves with a book of customers they don’t want,” warns Robinson.


Sweeping sanctions against Russia have also had important and wide-reaching ripple effects. EGA – with no direct exposure to sanctioned companies or people – has still felt the fallout, particularly manifest in restricted access to SWIFT. The company had contractual obligations to honour payments to its Russian suppliers incurred before the announcement of the sanctions, but the avenue to remit funds dramatically narrowed and became more complex, explains Shore. “In another twist, the compulsory conversion of FX into roubles by Russia’s central bank caused further challenges in meeting our contractual commitments,” he adds.

Western companies left unable to pay unsanctioned Russian customers and clients because banks compliance teams won’t authorise or process payments or offer trade finance is now commonplace, agrees LSEG’s Henderson. “If a company can’t pay clients and customers in the normal way, they aren’t going to be doing much business and it’s causing another challenge. Many companies are having to stop doing business with Russian entities whether they are sanctioned or not.” And it’s just as much of a factor for corporates in countries that haven’t imposed sanctions on Russia because failure to comply could trip secondary sanctions. That said, experts also report a merry go round of onboarding and offboarding whereby corporates offboard a client because they are outside their risk appetite, only for them to onboard with others.

The future

Small companies conducting short-term, risk-free transactions will continue – or return – to doing business with unsanctioned Russian entities. However, once they’ve left, large companies and banks will be very slow to return to Russia because of the cost and reputational risk. When sanctions were lifted against Iran in 2016, big business proved very reluctant to return. “Sanctions are easier to put on than take off,” says de Terán.

Changes to today’s FX processes could be another long-term consequence. Currencies have been weaponised by the war, illustrated in western economies freezing Russia’s foreign currency holdings in overseas central banks. One argument, increasingly heard, suggests that countries like India, Brazil and China won’t want to build large allocations to dollars overseas that could be confiscated if they incur the wrath of the US, challenging the idea that, as the idiom goes, dollars are as safe as houses. It could lead to corporates in these countries having more currency pools abroad or extending out their hedging programmes. When it comes to strategic imports, countries might even request payment in their local currency, or go through other currencies than the dollar. “From a treasurer’s point of view, the world starts to look a bit more complicated,” says de Terán. In contrast, although EGA’s Shore agrees that longer-term there may be greater calls from some quarters to move away from the US dollar as the world’s global currency, it is unlikely any time in the immediate future. “The lack of a viable alternative to the US dollar will maintain its primacy in global trade,” he says.

Could crypto begin to fill the gap in another long-term consequence? At the moment, treasury teams need to be equally (if not even more) wary of crypto transactions and particularly mindful of customers offering to pay or receive payment with crypto because they can’t pay via banks. “While crypto is not bad by itself, it isn’t necessarily an alternative. Even presuming you are legally allowed to buy the goods in question and that the seller itself is not subject to any sanctions, your bank may not be willing to bank the funds once you receive them, so you will be left holding crypto you can’t necessarily use and left carrying the ‘currency’ risk.” Indeed, she believes that cryptocurrencies are rarely used in a meaningful way for payments except between crypto currencies themselves – so, for example, a crypto trader might sell bitcoin and buy a stablecoin, says Tether, before reinvesting – much as you might sell out stocks and hold cash.

In one positive aside, experts conclude that compliance teams will be given a degree of slack by the regulator. “There isn’t zero tolerance to getting it wrong,” explains Robinson. “But there is a very low tolerance to getting it wrong.” If a company breaches sanction is a minor way, making one payment to a sanctioned entity, a declaration could suffice; any more breeches will bring an investigation, scrutiny and expose control weaknesses. “The penalty for getting it wrong can be huge but it is a spectrum; corporates should act quickly and put their controls in place,” concludes Robinson.

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