Following Russia’s invasion of Ukraine, the UK has been quick to join its Western allies in condemning Vladimir Putin’s regime and issuing economic sanctions. These sanctions have been swift, severe and designed to destabilise the country’s economy. In addition to these international moves, the UK government has also made significant progress with domestic legislation to better protect the UK’s financial system from exploitation. The newly passed Economic Crime Bill – in the words of Boris Johnson – will ensure that President Putin and his supporters will have “nowhere to hide” their illegal money.  

Given the global escalation in sanctions activity against Russia and the UK’s newly passed Economic Crime Bill, the landscape is rapidly shifting. It is therefore vital that banks and financial institutions stay ahead of their regulatory responsibilities.

Let’s explore what these measures mean and how those potentially impacted can ensure they remain on the right side of the law.

Responding to the sanctions

The sanctions imposed on Russia are expected to affect 70% of the country’s banking market – in particular companies involved in defence – and prevent Russian politicians and oligarchs from hiding their money in European safe havens. They are also expected to increase Russian borrowing costs, inflation and degrade Russia’s industrial sector.

However, with Russia’s invasion of Ukraine ongoing, the sanctions risk landscape is likely to remain fluid for the foreseeable future. The complexity of the EU’s Russia sanctions programme is further exacerbated by the capability of Russian oligarchs to hide money around Europe and conceal their footprints with corporate structures and shell companies. 

With that in mind, it is essential for banks and financial organisations to have a balanced approach to sanctions and watchlist management that offers a holistic perspective on potential risks. One of the best ways to stay ahead of evolving sanctions compliance obligations, is to implement effective adverse media screening. Organisations should deploy continuous monitoring and identification measures in order to detect high risk customer names as soon as they are featured in news stories.

Adhering to the Economic Crime Bill

Passed in early March of this year, the Economic Crime (Transparency and Enforcement) Bill is designed to reveal the identity of money launderers that exploit the UK’s financial system. First proposed in 2018, the conflict with Ukraine has brought the bill back onto the geopolitical agenda, prompting the UK government to fast-track the legislation, along with additional financial measures to follow in coming months. 

The bill has numerous measures, which banks and financial institutions would do well to take note of and adhere to. An important measure is a UK register of overseas entities that own property in the UK. The register will include information on the beneficial owners of those entities. UK companies are already required to provide beneficial ownership information to a register of People with Significant Control (PSC) and the new rules are intended to create parity for foreign entities. 

The register will apply retrospectively to property bought by people based overseas up to 20 years ago in England and Wales, and since December 2014 in Scotland. Noncompliance with the regulations may result in fines of up to £500 per day, and prison sentences of up to 5 years.

The UK government will also bring properties held by trusts into the scope of the existing system of so-called Unexplained Wealth Orders (UWO), which, if held up in court, allow British authorities to force disclosure of sources of wealth and potentially confiscate assets from their owners.

How the latest legislation strengthens sanctions enforcement

The Economic Crime Bill also reforms the UK’s sanctions enforcement rules by introducing strict liability for noncompliance. These rules were hailed as a ‘centre of excellence’ when they were first launched in 2016 by the chancellor at the time, George Osbourne.

However, under the old system, the government could only prosecute sanctions breaches if it had ‘reasonable cause to suspect’ that the person involved knew they were breaking the rules. As a result, only six fines totalling £20.7mn, were issued despite reports of potential breaches totalling £1bn in 2019/20 alone.

Now the government can impose financial penalties for sanctions breaches regardless of any awareness of wrongdoing. These improvements will make it easier for government to impose fines - and punish noncompliance with sanction requirements. They will also allow the government to publicly release the names of organisations that breach sanctions but that do not receive a fine.

What this means for banks and financial institutions

The UK has shown unprecedented resolve and commitment in increasing economic pressure on Russia with both its sanctions and the roll out of this Economic Crime Act.

However, the implementation will be extremely complex. Russian individuals and companies have been participating heavily in Europe – and particularly in the UK. Before the invasion, Russians had proved adept at using corporate structures and shell companies to obscure ownership. Governments will try to unpick the complexities which will likely ultimately lead to stricter controls on the way companies are created. Banks and others trading internationally should prepare for a rough ride as the situation unfolds.