Fund managers advised to improve KYC on Russian clients

10 Nov, 2014

Fund managers need to up the ante on their Know Your Client (KYC) procedures and due diligence on prospective clients from Russia amid concerns there is limited awareness about the scope of the sanctions.

Sanctions on companies in Russia are well-known among compliance professionals. Western sanctions have prohibited US and EU persons from transacting in new debt and equity of certain Russian corporations, banks and energy companies. Affected institutions include Gazprombank, Sberbank, Rosselkhozbank, Vnesheconombank (VEB) and VTB Bank. US sanctions also apply to the Bank of Moscow. However, these sanctions also extend to high-net-worth individuals (HNWIs) which invest in traditional and alternative fund vehicles.

“There is a bit of a grey area when it comes down to identifying HNWIs who might have trust funds or trust vehicles in the name of relatives, for example. While authorities will publish details of blacklisted individuals, firms soliciting money from trust vehicles or family office structures must conduct a look-thru to identify who the actual owner is. It is safe to say that trust vehicles in the name of a relative of a blacklisted individual ought to be avoided,” said Matt Gibbs, product manager at Linedata.

Unlike other markets subject to Western sanctions such as Sudan and Iran, there are lot of investment opportunities and investors in Russia. Non-compliance with sanctions is usually a recipe for disaster. BNP Paribas was fined a record $9 billion by the US Justice Department for violating sanctions in place against Cuba, Sudan and Iran. The French bank was also banned from clearing certain US dollar transactions for one year. Meanwhile, Standard Chartered was fined $667 million by US authorities for illegal money transactions with Iran and Sudan in 2013.

Other banks facing US regulatory scrutiny for sanctions-breaking include Commerzbank, Credit Agricole, Deutsche Bank, Societe Generale and UniCredit.  “An asset manager that falls foul of the rules would probably not incur a fine on par with that of a bank but the reputational damage would be serious,” commented Gibbs.

Another – albeit less likely – risk would be if a fund manager had a blacklisted Russian majority shareholder or seeder. Any firm with more than 50 per-cent ownership by a blacklisted individual would be subject to sanctions too. “The risk would be that a fund manager who found itself in this situation would see service providers cull their business with them, which would be a significant challenge to the continuation of the running of the firm,” said Gibbs.

Lawyers have generally advised fund managers not to exit Russia altogether but rather put a renewed compliance focus on transactions they carry out in the country.

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