Fund managers warned on Russia sanctions compliance

12 Sep, 2014

Sanctions compliance has historically been a relatively straightforward exercise, mainly because the targeted markets were either not functioning or attractive, so their appeal was predictably limited for even the most adventurous asset managers. The latest bout of US and EU sanctions on Russia amid the on-going conflict in The Ukraine are less clear-cut, and likely to have a material impact on the operations of quite a few fund managers.

Contrary to the likes of Iran, Cuba and Sudan, Russia has a working albeit dysfunctional market. Russian corporates and banks are listed on global stock exchanges and routinely traded and its high net worth population and institutions invest in traditional and alternative asset managers worldwide. In 2011, the highest echelon from Blackstone, GLG Partners and Goldman Sachs Asset Management (GSAM), speaking at a conference in London hosted by Bloomberg, highlighted the extensive opportunities offered by Russia.

Alas no more. The US Treasury Department’s Office of Foreign Asset Control (OFAC) has prohibited any US person from transacting in new debt or equity issued by a select group of Russian corporates, banks and energy conglomerates. The EU has imposed similar sanctions on securities issued by several well-known Russian banks including Sberbank, VTB Bank, Gazprombank, Vnescheconombank and Rosselkhozbank.

Regulators have, however, been pragmatic and permit firms with existing positions in blacklisted companies to continue trading. This approach was almost definitely driven by a fear that a surge in redemptions could ensue were fund managers forced to liquidate positions to comply with sanctions rules in what would certainly have facilitated a fire-sale of Russian assets at very low prices.

But sanctions compliance, given all of the incoming regulation, has not been at the forefront of fund managers’ minds, and it is something that needs to change. Lawyers report they are fielding calls by fund managers asking whether certain investment opportunities within Russia risk being in breach of sanctions.  The arbitrary nature of sanctions means government policy can rapidly change, and fund managers always want to be the first through the door when it does. Caution must be exercised though if managers wish to avoid falling foul of the US authorities.

US regulators have stamped their authority on those found to be in non-compliance of sanctions over the past few years. BNP Paribas was forced to pay $8.9 billion in fines and banned from clearing certain US transactions for one year after it processed transactions for groups in Sudan, Iran and Cuba between 2002 and 2012. HSBC was fined $1.9 billion by US authorities after its anti-money laundering (AML) controls allowed proceeds from drugs and transactions from sanctioned countries to flow through the US.

Meanwhile, Standard Chartered was forced to pay $300 million to the New York Department of Financial Services and suspend some of its US dollar clearing activities in Hong Kong and the United Arab Emirates (UAE) after short-comings were discovered in its AML procedures earlier this year. In 2012, the bank agreed to pay $667 million in fines for violating sanctions on Sudan, Iran, Libya and Myanmar.

Other banks facing US regulatory scrutiny for sanctions-breaking include Commerzbank, Credit Agricole, Deutsche Bank, Societe Generale and UniCredit.  It is inevitable that fund managers will face similar pressure. However, lawyers advise fund managers not to exit Russia altogether but rather put a renewed compliance focus on transactions they carry out in the country, and ensure that any investor capital from Russia is not derived from an individual blacklisted by the US or EU.  

fund managersRussiasanctionsregulatorsUSBNP ParibasfineHSBCStandard Chartered